China-ASEAN Economic Engagement

China-ASEAN Relations Economic Engagement and Policy Reform

China-ASEAN all chapters.indb 1

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China-ASEAN Relations Economic Engagement and Policy Reform

Editors Emile Kok-Kheng Yeoh Chan Sok Gee Wendy Chen-Chen Yong Joanne Hoi-Lee Loh

Institute of China Studies


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Institute of China Studies University of Malaya 50603 Kuala Lumpur Malaysia Tel: 603-79565663 Fax: 603-79565114

© Institute of China Studies First published in 2009

COPYRIGHT All rights reserved. No part of this publication may be reproduced, copied or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording or otherwise, without written permission from the publisher. Under the Copyright Act 1987, any person who does any unauthorized act in relation to this publication shall be liable to prosecution and claims for damages.

Perpustakaan Negara Malaysia Cataloguing-in-Publication Data China-ASEAN relations : economic engagement and policy reform / editors Emile Kok-Kheng Yeoh … [et al.]. Includes index Bibliography: p. 230 ISBN 978-967-5148-44-6 1. Southeast Asia—Foreign economic relations—China. 2. China— Foreign economic relations—Southeast Asia. I. Kok-Kheng, Emile Yeoh. 327.51059

Printed by Vinlin Press Sdn. Bhd. No. 2, Jalan Meranti Permai 1 Meranti Permai Industrial Park Batu 15, Jalan Puchong 47100 Puchong, Selangor Darul Ehsan


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Contents List of Tables

vii

List of Figures

ix

Contributors

xi

Introduction China-ASEAN Relations in the Regional Economy Emile Kok-Kheng Yeoh, Chan Sok Gee, Wendy Chen-Chen Yong and Joanne Hoi-Lee Loh

3

China-ASEAN Relations 1 China-ASEAN Economic Engagement: Building Mutual Confidence Shi Xueqin and Sengmanivong Keooudone

13

2 FTAs, China, the ASEAN Charter and the ASEAN Economic Community Teng Siow Song

33

3 Long-Run Currency Exposure of China-Malaysia Trade Chee-Wooi Hooy and Tze-Haw Chan

61

4 China-Burma Ties in 1954: The Beginning of the “Pauk Phaw” Era Fan Hongwei

77

Sub-regional and Provincial Perspectives 5 Economic Cooperation between Malaysia and Guangdong: Current Situation, Cause and Prospect Zhang Mingliang

95

6 Hainan, Yunnan and Guangdong State Farms’ Natural Rubber 104 “Going Global” Strategy and Cooperation with ASEAN Countries Zhang Desheng, Fu Guohua and Liu Zhiyong


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vi ♦ Contents

7 Regional Integration and Environmental Protection: The Case of Beibu Gulf Huang Yaodong

117

8 An Analysis of the Import Demand Function for ASEAN Five, China, Japan and Korea Wendy Chen-Chen Yong and Siew-Yong Yew

133

Policy Reform 9 Banking Reform in China Chan Sok Gee

145

10 Western Development in China: The Road to Sustainable Economic Growth Joanne Hoi-Lee Loh

159

11

168

Fiscal Reform and Dimensions of Decentralization: Some Observations on China Emile Kok-Kheng Yeoh, Lionel Wei-Li Liong and Susie Yieng-Ping Ling

12 Development of Public-Private Partnerships: China and Australia in Perspective LooSee Beh

186

Index

215


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List of Tables Table 1.1 Bulk Commodity Export from China to ASEAN, 2004 Table 1.2 Bulk Commodity Export from ASEAN to China, 2004 Table 1.3 Total Top Ten ASEAN Trade Commodity Groups Table 1.4 Shares of ASEAN and China in Textiles/Apparel and Machinery/Electrical Appliances Import of USA, EU and Japan Table 1.5 Growth of GDP in China and ASEAN, 2002-2007 Table 1.6 ASEAN’s FDI to China, 1997-2007 Table 1.7 Structure of Export from GMS5 Countries to China Table 1.8 Structure of Import of Five GMS Countries from China

17 17 18 19

Table 2.1 Intra-Regional Trade Shares, 1980-2006 Table 2.2 Trade Statistics of ASEAN Countries with China, January-June 2008 Appendix Origins and Destinations of East Asian Intra-Trade Table 2.1 Appendix Main Bilateral FTA/EPA of the East Asian Nations Table 2.2

36 37

Table 3.1 China-Malaysia Trade Balance Model: Descriptive Statistics and Correlation Table 3.2 China-Malaysia Trade Balance Model: De-trending and Removal of Structural Breaks Table 3.3 China-Malaysia Trade Balance Model: Regression Results for Long-Run Elasticity

68

Table 5.1 Trade between China and Malaysia Table 5.2 Trade between China and ASEAN Table 5.3 Guangdong’s Trade with Malaysia and ASEAN Table 8.1 Table 8.2


20 21 25 26

56 58

69 71 96 97 98

Unit Root Tests of Import Demand Function for 136 ASEAN-5 plus 3 Countries Cointegration Analysis Test of Import Demand Function for ASEAN-5 plus 3 Countries 137

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viii ♦ List of Tables

Table 8.3

FMOLS Regressions of Import Demand for ASEAN-5 plus 3 Countries

138

Table 9.1 Index of Monetary Freedom in China, 1995-2001 Table 9.2 Index of Financial Freedom in China, 1995-2001 Table 9.3 Market Shares for Types of Banking Institutions in China in Terms of Total Assets, 2003-2007 Table 9.4 China: Top 10 Banks in Terms of Total Assets, 2003-2007 Table 9.5 China: Top 10 Banks in Terms of Total Deposits, 2003-2007 Table 9.6 China: Top 10 Banks in Terms of Total Loans, 2003-2007

148 149 152

Table 10.1 Industrial Composition in Western China, 2006 Table 10.2 China: Percentage of Well-off (Xiaokang) Society by Region, 2002-2006

163 164

Table 11.1 Table 11.2

171 174

China: Central Government Expenditure, 2008 and 2009 China: Transfers from Central Government and Sub-total Revenue (i.e. Revenue which Are Not Transfers from Central Government) of Local Governments, 1999-2008, and General and Earmarked Transfers and Tax Revenue Rebate, 2008 Table 11.3 China: Central-to-Local Governments’ Transfer Payments and Tax Revenue Rebate, 2008-2009 Table 11.4 China: Rural Poverty

154 155 156

177 182

Table 12.1 Wang Hao’s (2004) Classification of PPP system in China 188 Table 12.2 Types of PPP in China 189


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List of Figures Figure 1.1 Figure 1.2 Figure 1.3 Figure 1.4 Figure 1.5 Figure 1.6

Trends in China-ASEAN Bilateral Trade, 2000-2007 China’s Four Biggest Trade Partners, 2007 Top Ten ASEAN Trade Partners, 2006 Trends in China-ASEAN FDI Flows, 1995-2006 ASEAN’s Share of Total FDI Inflow to China, 1997-2005 Shares of FDI Flows to ASEAN from ASEAN’s Dialogue Partners, 2002-2006

15 15 16 20 21 22

Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 2.5 Figure 2.6 Figure 2.7 Figure 2.8

Evolution of Economic Integration Selected East Asian Economies’ Inflow FDI, 1995-2005 China’s Trade Growth, 1990-2007 China’s Trade Balance with Selected Economies Contribution of Domestic Demand and External Demand to China’s GDP Growth, 1990-2006 Singapore’s Trade with Malaysia Economic Growth of China and Singapore, 1981-2007 FDI into China

35 38 42 43 43 44 46 46

Figure 3.1 China-Malaysia Trade Balance Model: Response of Trade Balance to Real Exchange Rate Shocks

74

Figure 5.1 China’s Trade with ASEAN and Malaysia Figure 5.2 Guangdong’s Trade with Malaysia and ASEAN Figure 5.3 China’s and Guangdong’s Trade with Malaysia

97 98 99

Figure 9.1

Market Shares for Types of Banking Institutions in China in Terms of Total Assets, 2003-2007

153

Figure 10.1 Sketch of Western China Figure 10.2 Gross Regional Product in Western China, 2006 Figure 10.3 China: Distribution of Absolute Poverty Population in Countryside by Region, 2006

160 161

Figure 11.1 China: Central Government’s Fiscal Balance, 2008 Figure 11.2 China: Local Governments’ Fiscal Balance, 2008

170 170


163

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♦ List of Figures

Figure 11.3 China: Central-to-Local Governments’ Earmarked 175 Transfers and Other Local Government Revenues, 2008 Figure 11.4 China: Transfers from Central Government and Sub-total 175 Revenue (i.e. Revenue which Are Not Transfers from Central Government) of Local Governments, 1999-2008 Figure 11.5 China: Transfers from Central Government and Sub-total 176 Revenue (i.e. Revenue which Are Not Transfers from Central Government) as Percentages of Total Revenue of Local Governments, 1999-2008 Figure 11.6 China: Central-to Local Governments’ Transfer 178 Payments, 2008-2009 Figure 11.7 China: Central-to-Local Governments’ General 178 Transfers by Item, 2008 Figure 11.8 China: Central-to-Local Governments’ Earmarked 179 Transfers by Item, 2008 Figure 11.9 China: Government Expenditure and Revenue as 180 Percentages of GDP, 1990-2007 Figure 11.10 China: Local Government Expenditure and Revenue 181 Respectively as Percentages of Total Government Expenditure and Revenue, 1990-2007 Figure 11.11 China: Ratio of Local to Central Government Revenue, 181 1990-2007 Figure 11.12 Von Braun and Grote’s Conceptual Framework on 183 Decentralization and Poverty Reduction


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Contributors Dr LooSee Beh 马露丝, Senior Lecturer, Department of Administrative Studies and Politics, Faculty of Economics and Administration, University of Malaya, Malaysia. Email: [email protected] Dr Chan Sok Gee 陳淑儀, Senior Lecturer, Institute of China Studies, University of Malaya, Malaysia. Email: [email protected] Tze-Haw Chan 曾志浩, Centre for Globalization and Sustainability Research, Faculty of Business and Law, Multimedia University, Malaysia. Email: [email protected] Dr Fan Hongwei 范宏伟, Associate Professor, Faculty of International Relations and Research School of Southeast Asian Studies, Xiamen University, China. Email: [email protected] Dr Fu Guohua 傅国华, Professor and Dean, College of Economics, Hainan University, Hainan Province, China. Email: [email protected] Dr Chee-Wooi Hooy 方志伟, Finance Section, School of Management, Universiti Sains Malaysia, Malaysia. Email: [email protected] Dr Huang Yaodong 黄耀东, Research Fellow and Associate Professor, Institute of Southeast Asian Studies, Guangxi Academy of Social Sciences, Guangxi Zhuang Autonomous Region, China. Email: huangyd99999@yahoo. com.cn Susie Yieng-Ping Ling 林燕萍, Administrative Officer, Institute of China Studies, University of Malaya, Malaysia. Email: [email protected] Lionel Wei-Li Liong 梁偉利, Project Research Officer, Institute of China Studies, University of Malaya, Malaysia. Email: [email protected] Liu Zhiyong 刘志勇, Economic and Financial College, Xi’an Jiaotong University, Shaanxi Province, China. Email: [email protected]


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xii ♦ Contributors

Joanne Hoi-Lee Loh 羅慧麗, Institute of China Studies, University of Malaya, Malaysia. Email: [email protected] Sengmanivong Keooudone, Staff Official, Lao’s People Revolutionary Youth Union, Vientiane, Lao PDR. Email: [email protected] Dr Shi Xueqin 施雪琴, Deputy Director and Associate Professor, Institute of Malaysian Studies, Faculty of International Relations and Research School of Southeast Asian Studies, Xiamen University, Fujian Province, China. Email: [email protected] Teng Siow Song 丁少雄, Research Associate, East Asian Institute, National University of Singapore. Email: [email protected] Dr Emile Kok-Kheng Yeoh 楊國慶, Director and Associate Professor, Institute of China Studies, University of Malaya, Malaysia. Email: emileyeo@correo. nu, [email protected] Dr Siew-Yong Yew 尤秀香, Senior Lecturer, Department of Economics, Faculty of Economics and Administration, University of Malaya, Malaysia. Email: [email protected] Dr Wendy Chen-Chen Yong 楊珍珍, Senior Lecturer, Institute of China Studies, University of Malaya, Malaysia. Email: [email protected] Zhang Desheng 张德生, Economic and Financial College, Xi’an Jiaotong University, Shaanxi Province, and Management College, Hainan University, Hainan Province, China. Email: [email protected] Dr Zhang Mingliang 张明亮, Institute of Southeast Asian Studies, Jinan University, Guangdong Province, China. Email: [email protected]


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China-ASEAN Relations in the Regional Economy ♦

Introduction


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♦ Emile Kok-Kheng Yeoh, Chan Sok Gee, Wendy Chen-Chen Yong and Joanne Hoi-Lee Loh


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Introduction China-ASEAN Relations in the Regional Economy Emile Kok-Kheng Yeoh, Chan Sok Gee, Wendy Chen-Chen Yong and Joanne Hoi-Lee Loh

Over the recent decades, China’s highly remarkable economic expansion has made the country the central focus of the world. The emergence of China began with economic reform since the late 1970s and over the recent decades, China has gained substantial global influence in both the political and economic spheres. This has created a wide range of opportunities as well as risks for ASEAN (Association of Southeast Asian Nations) countries. In terms of opportunities, with a large and fast growing market, China has become the global buyer of goods and services from other countries, including the member countries of ASEAN. This is because of the need for raw materials to sustain the rapid growth of the country’s economy especially in the manufacturing sector. As pointed out by Wattanapruttipaisan (2003), poorer ASEAN countries may enjoy greater access to the Chinese market due to the demand for raw materials and some manufactured products. Hence, this can be viewed as trade creation for the developing countries in ASEAN. Nevertheless, the growth of China’s market also poses risks for the developing countries in ASEAN especially the countries with economic activities similar to the Chinese. This is especially true because China is well-known for her lower labour costs (Tongzon, 2005). Due to this factor, the Asia-Pacific countries are faced with intense competition in terms of inward foreign direct investment (FDI) flows into China. As highlighted by Laurenceson (2003), the accession of China into the World Trade Organization in 2001 has remarkably increased the number of export markets and FDI flows into China and this has simultaneously reduced the inflows of FDI to other developing countries in the Asia-Pacific. Therefore, regional integration is required in order to provide a winwin situation between China and ASEAN so as to boost international trade


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among Asia-Pacific countries. Through regional integration, opportunities could be exploited of the large Chinese market by creating new trade, and investment channels for all the countries. From China’s perspective, through regional integration, she will be able to expand her market shares into the neighbouring countries. In addition to that, China can also obtain cheaper raw materials from the developing countries in ASEAN which will eventually improve the competitiveness of their manufacturing sector and hence contribute to a more cost efficient production process. As globalization and liberalization around the world are creating intense competition between countries in the global arena, regional integration is crucial for the sustainability of economic growth, structural transformation, and social development for the developing countries. China-ASEAN Relations The first section of the book “China-ASEAN Relations” begins with Shi Xueqin and Sengmanivong Keooudone’s chapter “China-ASEAN Economic Engagement: Building Mutual Confidence” which focuses on issues leading towards the development of China-ASEAN Free Trade Area (CAFTA), and discusses the FDI flows to ASEAN and China to shed light on the impact of regional integration upon foreign investment. Discussing the economic collaborations between the less developed countries in ASEAN as well as between the developing countries in ASEAN and China, Shi and Sengmanivong address the various facts of China-ASEAN economic engagement, its potential, impact and future trends. The chapter also emphasizes that the major political hiccups between China and ASEAN should well be resolved due to the larger economic interests of China-ASEAN relations in reshaping the regional order. As such, economic engagement has emerged as the most reliable and agreeable instrument of China-ASEAN rapprochement. Teng Siow Song, in the second chapter of this section, “FTAs, China, the ASEAN Charter and the ASEAN Economic Community”, continues with the discussion on the issue of regional trade agreements, including the issues and challenges faced by the FTAs in general as well as regional trade agreements between ASEAN and China. While scrutinizing the factors that contribute to regional integration, Teng also pays particular attention to the development of the ASEAN Charter and potential realization of the ASEAN Economic Community. While one could doubt the ability of the Charter and the AEC as a panacea to all of ASEAN’s problems, it is nevertheless, he argues, a right direction for ASEAN and a road worth and ought to be taken.


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Focusing on China-Malaysia bilateral trade relations, Chee-Wooi Hooy and Tze-Haw Chan in Chapter Three, “The Long-Run Currency Exposure of China-Malaysia Trade”, investigate the exchange rate exposure – which remains an unresolved issue in international trade literature – of ChinaMalaysian bilateral trade balance over the last two decades using a standard trade balance equation which is a function of local income, foreign income, and the bilateral real exchange rates of yuan/ringgit. Focusing on an issue which is particularly relevant to China and Malaysia, who relaxed their USD pegging on the same day in mid-2005, Hooy and Chan’s modeling is somewhat different from the literature as they take into account the structural breaks of the 1997 Asian currency crisis as well as the fixed-exchange rate regime adopted by the Malaysia. With high frequency monthly sample from January 1990 to January 2008, the chapter documents the GARCH effect in the trade model and shows that real exchange rates do play a role in the bilateral trade between China and Malaysia, with long-run exchange rate elasticity being consistent with the Marshall-Lerner condition while the short-run J-curve phenomenon somewhat inconclusive. This section ends with a historical note from Fan Hongwei, in his chapter “China-Burma Ties in 1954: The Beginning of the ‘Pauk Phaw’ Era”, focusing on the manifestation, causes and impact of the change in relations between Burma and China during the early period after the formation of the People’s Republic of China. The year 1954, according to Fan, was the turning point, after which Sino-Burmese relations entered the friendly “Pauk Phaw” (fraternal) era which subsequently lasted through the Cold War. Fan’s analysis of this milestone in Sino-Burmese relations serves well as a backdrop in the reading of this section with regards to the remarkable pace of change that has occurred over the years in the relationship between the ASEAN countries and their overshadowing neighbour to the north. The subsequent section of the book, “Sub-regional and Provincial Perspectives”, begins with a chapter by Zhang Mingliang, “Economic Cooperation between Malaysia and Guangdong: Current Situation, Cause and Prospect”, that analyzes the economic cooperation between Malaysia and China, focusing on China’s Guangdong province. The economic cooperation between Malaysia and Guangdong, which include bilateral trade and investment, has been increasing rapidly in recent years, according to Zhang, due in large part to the improvement in overall Sino-Malaysian relations, the remarkable development of Guangdong’s economy, the complementarity between the two economies, the commendable role of both governments, favourable geographical positions and the special role of the Chinese overseas in Malaysia. Highlighting the overall


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trade relationship between China and Malaysia as well as between Guangdong and Malaysia, this chapter scrutinizes the causes that serve to enhance or impede bilateral cooperation and ponders the prospects in the coming years. Given the importance of raw materials in China’s economic development and as highlighted earlier, the fact that China has become the main buyer of raw materials from the ASEAN countries, for cost effectiveness regional collaboration has gained increasing urgency between the Asian giant and ASEAN in recent years. In the subsequent chapter of this section, “Hainan, Yunnan and Guangdong State Farms’ Natural Rubber “Going Global” Strategy and Cooperation with ASEAN Countries”, Zhang Desheng, Fu Guohua and Liu Zhiyong discusses this issue with particular focus on the natural rubber production in the Hainan, Yunnan, and Guangdong provinces of China against the backdrop of the fast developing China-ASEAN regional integration. While China is the top consumer of natural rubber in the world, according to the authors, her self-sufficiency is less than one third at the moment. Highlighting the fact that the Hainan, Yunnan and Guangdong State farms are the three major natural rubber production bases in China which provided nearly 58.37 per cent of the natural rubber output in 2007, and that, the three State farms have since 2002 planned and implemented the “Going Global” strategy and proceeded to develop substantive cooperation with the ASEAN countries while trying hard to expand natural rubber planting and processing to Southeast Asia countries, Zhang, Fu and Liu summarize the concrete practice of the natural rubber “Going Global” strategy of the three State farms, examine its advancement and analyze the positive factors and the constraints, as well as the mode selection of cooperation. According to the authors, such issues are not only expected to be important for the success of natural rubber’s “Going Global” strategy, but also crucial for strengthening overall cooperation between China and the ASEAN countries. While the potentials seem promising, Zhang, Fu and Liu also highlight various constraints in terms of the support from cooperative countries, changes in political, economic and natural environments, investors and labour, the last of which brings to mind a related paper by Zheng and Fu (2008) on the importance of further integration between China and ASEAN in solving labour shortage in the natural rubber industry. Focusing on various aspects of the labour shortage problem of the natural rubber industry in this region, Zheng and Fu note that to meet China’s needs, the natural rubber outputs in ASEAN countries have been expanding rapidly, contributing to the labour shortage in the industry. In short, as Zheng and Fu summarize succinctly in the abstract of their paper, China is the origin of the problem and yet paradoxically, also the solution.


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In the next chapter of this section, “Regional Integration and Environmental Protection: The Case of Beibu Gulf”, Huang Yaodong looks at another aspect related to China-ASEAN regional integration – the threat to the natural environment posed by breakneck economic advancement. Examining the increasing exploitation and utilization of natural resources resulting from rapid development of economic globalization and regional economic integration, Huang focuses on the threat of environmental destruction to the GuangxiBeibu (Tonkin) Gulf (北部湾/东京湾) economic zone and warns of the imminent damage to the eco-system of the ocean’s maiden bay. Drawing upon the painful lesson of the polluted China’s Bohai (渤海) Bay, he posits the utmost urgency to save the nature of Beibu Gulf from the impending environmental disaster resulting from overexploitation of the region’s natural resources. Moving on from raw material and environmental protection back to regional trade, Wendy Chen-Chen Yong and Siew-Yong Yew in Chapter Eight, “An Analysis of the Import Demand Function for ASEAN Five, China, Japan and Korea”, bring us to some empirical evidences on the determinants of import flows in ASEAN 5 plus 3. In this context, Yong and Yew focus on panel data estimation based on cointegration analysis on the effects of domestic income and relative import prices towards the import demand of ASEAN 5 plus 3. The results show that trade liberalization gives a significant impact on import growth of the region. Besides that, the findings show that an increase in the relative import prices is likely to leave the import bill unchanged for the region. Nevertheless, the inelastic long-run income elasticity of import shows that the economic growth is least likely to worsen the balance of payments difficulties of the region. Policy Reform Besides looking at the issue of regional integration between China and ASEAN, the book also focuses on various pertinent aspects of policy reform that have taken place in China since 1978 as a domestic backdrop to the country’s “going global” and “good neighbourliness” policies that have made the above-said regional integration possible. The last section of the book, “Policy Reform”, begins with a chapter “Banking Reform in China” by Chan Sok Gee that examines the steps taken by the Chinese authorities since economic reform began in 1978 to bring the banking sector in China to the world economy. Chan analyzes the issue by separating the chapter into three sections on banking reforms with a detailed discussion on the role of


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the central bank as well as the influence of State-owned commercial banks towards the financial system of the country. In addition, she also highlights the issue of foreign banking operations in the country. Next, in the second chapter of this section, “Western Development in China: The Road to Sustainable Economic Growth”, Joanne Hoi-Lee Loh turns to the issue of regional development in China by concentrating on the effectiveness of the “Develop the West” (xibu dakaifa 西部大开发) strategy of the country since early 21st century. Loh specifically focuses on the development of the western region of China in relation to the pertinent issue of poverty and development, as well as the issue of well-off (xiaokang 小康) society after the launching of the “Develop the West” programme. This is crucial, she posits, because the Chinese government believes that the “Develop the West” programme will contribute to the development of the western region in order to achieve rapid economic growth in the long run. After looking at banking sector reform and regional development, the last two chapters of this section shift our focus to the Chinese public sector. Emile Kok-Kheng Yeoh, Lionel Wei-Li Liong and Susie Yieng-Ping Ling in Chapter Eleven, “Fiscal Reform and Dimensions of Decentralization: Some Observations on China”, present various observations on the dimensions of decentralization in China. Noting that the analyses on spatial dimension of politics in terms of decentralization in China have so far invariably utilized the typology of administrative versus economic decentralization, Yeoh, Liong and Ling further postulate the pertinence of the inclusion of the implications on poverty reduction and interregional disparity in further research on fiscal reform and dimensions of decentralization. Focusing on public-private partnerships (PPPs), LooSee Beh, on the other hand, in the closing chapter of this book, “The Development of Public-Private Partnerships: China and Australia in Perspective”, examines the development in mainland China and the Chinese Special Administrative Region of Hong Kong of this latest “new public management” of the provision of public infrastructure with a focus on services and/or outputs, juxtaposing it with Australian experience in the evolution of PPPs. Noting that PPPs may be a new initiative and still developing in mainland China, Beh suggests that China could benefit from PPP experiences in other countries in areas where the private sector has a proven track record in the successful delivery of assets and their ancillary service needs and even within China, the relatively better PPP governance in the Hong Kong Special Administrative Region. In short, she observes, there is a general need to explore what could be learned through global and local comparisons across all existing PPPs.


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Acknowledgements This volume represents a collection of research papers regarding ChinaASEAN relations with particular focus on regional economic integration as well as China’s policy reform. Earlier versions of some of the chapters in this book were presented at the international conference “China-ASEAN Regional Integration: Political Economy of Trade, Growth and Investment” jointly organized by the Institute of China Studies (ICS), University of Malaya, and the Institute of Malaysia Studies, Xiamen University, and held in Kuala Lumpur in October 2008. Several other papers from the conference have been published earlier in the ICS books China in the World: Contemporary Issues and Perspectives (2008) and Regional Political Economy of China Ascendant: Pivotal Issues and Critical Perspectives (2009). Hence, the present book China-ASEAN Relations: Economic Engagement and Policy Reform represents the third volume related to the conference. Chapters 1, 2, 3, 5, 6, 7 and 12 of this volume are revised versions of papers presented in the said conference. The editors and the Institute of China Studies would like to thank these conference presenters who have since taken the effort to revise their papers for inclusion in this volume as well as the other authors who have contributed some great new papers to this book. Miss Si-Ning Yeoh’s help in the tedious task of meticulous language editing various papers submitted is greatly appreciated. We would also like to thank Mr Foo Ah Hiang for his excellent typesetting and Miss Susie Ling Yieng Ping, Miss Geeta Gengatharan, Miss Nazirah binti Hamzah and Mr Sallehuddin bin Ismail at ICS for the administrative support in making this book possible. References Laurenceson, J. (2003), “Economic Integration between China and ASEAN”, Discussion Papers Series No. 39, School of Economics, University of Queensland, Australia. Tongzon, J. (2005), “ASEAN-China Free Trade Area: A Bane or Boon for ASEAN Countries?”, World Economy, 28(2), pp. 191-210. Wattanapruttipaisan, T. (2003), “ASEAN-China Free Trade Area: Advantages, Challenges, and Implications for the Newer ASEAN Member Countries”, ASEAN Economic Bulletin, 20(1), pp. 31-48. Zheng Xiaofei and Fu Guohua (2008), “A Study on Countermeasure for Labour Force Shortage in Natural Rubber Industry with Reference to China-ASEAN Regional Integration”, paper presented at the international conference “China-ASEAN Regional Integration: Political Economy of Trade, Growth and Investment” jointly organized by the Institute of China Studies, University of Malaya, and the Institute of Malaysian Studies/Research School of Southeast Asian Studies, Xiamen University, 14-15 October 2008, University of Malaya, Kuala Lumpur.


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10 ♦ Emile Kok-Kheng Yeoh, Chan Sok Gee, Wendy Chen-Chen Yong and Joanne Hoi-Lee Loh


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China-ASEAN Economic Engagement ♦ 11

China-Asean Relations


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12 ♦ Shi Xueqin and Sengmanivong Keooudone


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Chapter 1 China-ASEAN Economic Engagement: Building Mutual Confidence Shi Xueqin* and Sengmanivong Keooudone**

Introduction China and ASEAN today represent two major and dynamic societies in East Asia. Since the 1990s, with the normalization of the relationship between them as well as their rapid economic development, China and ASEAN countries have come to be more important players in the East Asia regional economic integration. China and ASEAN leaders signed the Framework Agreement on China-ASEAN Comprehensive Economic Cooperation and decided to build a China-ASEAN free trade zone by 2010. In July 2005, the Goods Trade Agreement of the China-ASEAN free trade zone took effect. The two sides lowered tariffs for more than 7,000 kinds of commodities. In January 2007, China and ASEAN signed the Service Trade Agreement. These measures have vigorously promoted the volume of bilateral trade. With the establishment of the free trade zone, trade and investment between the Chinese and ASEAN economies are expected to increase significantly. Besides the establishment of the free trade zone, China and ASEAN countries have been exploring to deepen and widen sub-regional economic cooperation with great efforts under the China-ASEAN economic cooperation framework, clearly witnessed in the two emerging sub-regional economic cooperation programmes, namely the Greater Mekong sub-region cooperation and the Pan-Beibu Gulf economic cooperation. With the aim of enhancing regional growth, equity and prosperity and working towards a win-win strategy, these two sub-regional economic cooperation programmes, almost encompassing the southwestern provinces of China and all ASEAN countries, have drawn a great deal of attention of China and ASEAN. China and ASEAN are two economically complementary and competitive partners. The establishment of the free trade zone and implementation of sub-regional economic cooperation, on the one hand, undoubtedly will significantly promote the rapid growth 13


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of bilateral trade and investment, while on the other hand will certainly produce new challenges and problems for both China and ASEAN countries, especially when the ASEAN countries are confronting China, one of the great economies in the world, which is still a dominantly export-oriented economy and presenting similarities in trade as well as industrial structure with the ASEAN countries to some extent. In addition, at present, there still exist political hiccups between China and some ASEAN countries, such as the South China Sea disputes. Does economic engagement promote political confidence-building and offer a feasible and effective solution to the political dispute between the two sides? It is not a blindly optimistic hypothesis. Obviously, as regional economic integration today is the unavoidable trend for all countries, China and ASEAN countries, as neighbours inextricably linked geographically by land and water as well as closely linked historically by trade and other communications, and currently rising as two newly industrial economies with great potentials to be integrated economically, economic engagement had emerged as the most reliable and agreeable instrument of China-ASEAN mutual confidence-building. Bilateral Trade Bilateral trade volume is widely recognized as an important indicator reflecting the economic engagement of two sides. In the past, ASEAN’s trade with China was relatively small, as compared to trade with other major partners like USA, EU, and Japan. China and ASEAN trade was only US$523 million in 1975. It is gratifying to see that their bilateral trade volume has gone up from US$20 billion in 1996 to almost 40 billion by 2000, an increase of 45 per cent over 1999. In 2001, the China-ASEAN bilateral trade was further enlarged to be worth US$41.6 billion, up by 5 per cent over the previous year, among which ASEAN’s exports to China was worth US$23 billion and China’s exports to ASEAN was US$19 billion. In November 2002, China and ASEAN signed the Framework Agreement of Comprehensive Economic Cooperation, launching the process of establishing the China-ASEAN Free Trade Area (CAFTA). This agreement officially served as the legal basis for CAFTA, resulting additionally in the growth of their bilateral trade which exceeded US$100 billion in 2004 and was a whopping US$202.55 billion in 2007, making both ASEAN and China the fourth biggest trade partners for each other respectively. Thus, undoubtedly, China-ASEAN bilateral trade has gradually come to occupy the centre-stage of China-ASEAN economic engagement.


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Figure 1.1 Trends in China-ASEAN Bilateral Trade, 2000-2007

Source: Ministry of Commerce of People’s Republic of China at http://www. mofcom.gov.cn Figure 1.2 China’s Four Biggest Trade Partners, 20071

Source: Ministry of Commerce of People’s Republic of China.

In addition, it is important to compare China-ASEAN bilateral trade. From 1993, ASEAN has had large trade surplus with China, ASEAN trade surplus with China was about US$8 billion in 2001 and US$20 billion in 2004. In the early 1990s, China’s trade market share for ASEAN was very marginal, i.e. nearly 2.1 per cent in 1993. With further enlargement of the ASEAN


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Figure 1.3 Top Ten ASEAN Trade Partners, 20062

Source: ASEAN Secretariat website, http://www.aseansec.org

trade with China, China’s trade market share for ASEAN had gone up to 9.3 per cent in 2007, and ASEAN was ranked the fourth biggest trade partner with China. Meanwhile, China was ranked as one of ASEAN’s top ten trade partners in 2006. Furthermore, along with the constant increase in the volume of ChinaASEAN trade, the trade structure has also been optimized, moving gradually from mainly primitive/raw material products to machines, electrical products and high and new technology products. Mechanical, electrical, high and new products as a share of the trade have been on the rise every year, accounting for over half of the total trade. However, with respect to China-ASEAN bilateral trade, it is worth noting the unbalance of structure of trade between the two sides. Firstly, the problem is that the trade in commodities makes up a significant section of bilateral trade, while the trade in services only constitutes a very small section of bilateral trade, which demonstrates that China-ASEAN bilateral trade still stands at the primary stage, demanding further trade in the tertiary industry. Remarkably, China and ASEAN signed an agreement on Trade in Services in line with the China-ASEAN Free Trade Area at the China-ASEAN Summit in Cebu in January 2007, with the aim of expanding trade in services in the region.


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Table 1.1 Bulk Commodity Export from China to ASEAN, 2004 Item

Amount (US$ billion)

%

Total

62.98

100.00

Machine, Electrical & Electronic Products New technology products Automatic data processing equipment (parts) Yarn & textile product Ic module & micro electronic parts Petroleum products Automatic data processing equipment & pieces Clothing & Accessories Hand telephone set & car-mount radio telephone Raw steel material TV radio & parts Steel billet & rough forging pieces

23.59 13.08 2.88 2.84 2.43 1.93 1.93 1.72 1.44 1.42 1.40 0.96

37.46 20.76 4.57 4.52 3.85 3.07 3.07 2.73 2.29 2.25 2.22 1.52

Source: http://www.caexpo.org/gb/aboutcaexpo/aboutexpo/t20060411_59005.html Table 1.2 Bulk Commodity Export from ASEAN to China, 2004 Item

Amount (US$ billion)

%

Total

42.90

100.00

Machine, Electrical & Electronic Products New technology products Ic module & micro electronic parts Automatic data processing equipment (parts) Crude oil Manufactures of Plastics Petroleum Products Automatic data processing equipment & parts Edible vegetable oil Diode & Semiconductor device Crude rubber TV radio & parts

36.77 30.47 17.37 6.09 3.65 3.28 3.00 2.06 1.87 1.50 1.48 0.91

85.70 71.01 40.48 14.21 8.49 7.65 7.00 4.81 4.36 3.49 3.45 2.13

Source: http://www.caexpo.org/gb/aboutcaexpo/aboutexpo/t20060411_59005.html


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541,411.1

Total top ten commodity groups*

1,033,737.0

Total Trade 72.1

Exports

75.3

Imports

73.6

Total Trade

Share to total ASEAN trade

(value in US$ million; share in per cent)

Top ten commodity groups refer to following items: (1) electric machinery equipment and parts; sound equipment, television equipment; (2) mineral fuels, mineral oil or products of their distillation; bitumen substances; mineral wax; (3) nuclear reactors; boilers, machinery and mechanical appliances; parts thereof; (4) plastics and articles thereof; (5) organic chemicals; (6) vehicles; parts and accessories; (7) optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments/apparatus; parts or accessories; (8) Iron and steel; (9) rubber and articles thereof; (10) natural or cultural pearls, precious or semi-precious stone, precious metals and metals of clad therewith and articles thereof; imitation jewelry; coin. Source: ASEAN Secretariat website, http://www.aseansec.org

NB:

Imports

Exports

492,325.8

Value

Table 1.3 Total Top Ten ASEAN Trade Commodity Groups


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Apart from that, there is considerable overlap in the composition of their major export items, particularly in textiles and apparel and other labourintensive manufactures. As China’s manufacturers climb the technology ladder, the overlap is spilling over into electrical and electronic products, where a number of ASEAN countries had initially established a lead. The overlap of China-ASEAN export undoubtedly intensifies competition between the two sides. Table 1.4 Shares of ASEAN and China in Textiles/Apparel and Machinery/ Electrical Appliances Import of USA, EU and Japan (%) Textile and Apparel From

Machinery and Electrical Appliances

USA

EU

Japan

USA

EU

Japan

ASEAN 1999 1996 1993

10.37 10.98 11.81

4.76 4.27 4.32

8.36 8.93 7.83

15.58 17.31 14.41

5.57 5.74 4.34

23.46 22.01 17.08

China

11.21 12.48 16.07

6.74 5.40 6.64

61.68 51.38 43.72

8.33 5.56 3.72

2.69 1.84 1.58

12.36 8.86 5.02

1999 1996 1993

Source: “Forging Closer ASEAN-China Relations in the 21st Century”, a report submitted by ASEAN-China Export Cooperation, 2001, p. 21. See http:// www.aseansec.org

Recent trade relations between China and ASEAN have been influenced mainly by the growth and expansion of both economies, and their drives toward modernization and industrialization. Indeed, China’s economic reform and ASEAN industrialized countries as well as newly emerging economies have created stronger factors in both economies which demand and also ensure stable economic interactions as well as new dynamism in their trade relations. Growth of gross domestic product (GDP) and foreign direct investment (FDI) flow for both China and ASEAN in recent years have certainly been indicators of rapid growth, thus creating newer avenues for China-ASEAN trade and commerce. As China furthered reform and opening up to the outside world in the 1990s, the country’s GDP growth rate has been maintaining credibly as high as 7 to 9 per cent per annum, even shooting up to 13.5 per cent in 1995, about 11 per cent in 2006, and about 12 per cent in 2007 with double-digit


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growth rate. Similarly, ASEAN’s GDP growth rate has been going around 5 to 6 per cent recently. This similar high rate of growth today brings China and ASEAN closer together to evolve similar strategies for development and portends great cooperation. Since the 1990s, FDI has been a significant drive to push China’s GDP growth. China’s FDI has persistently surpassed US$40 billion annually after the 1997 East Asia financial crisis. In 2006, China’s FDI had gone up to US$63 billion. Similarly, ASEAN has been a great reservoir for FDI flow since the 1990s. In the mid-1990s, ASEAN’s concentrated FDI stood at US$28.2 billion in 1995, US$30.2 billion in 1996, US$34.1billion in 1997, US$22.4 billion in 1998, and US$27.4 billion in 1999, which is much less than China, but far more than India, another Asian newly emerging economy. Since 2002, FDI flows to ASEAN have gone up with rapid growth, which has peaked at US$52.4 billion in 2006. From 1995 to 2006, FDI to ASEAN has reached US$357 billion in total. Table 1.5 Growth of GDP in China and ASEAN, 2002-2007 (percentage) Region/Year China ASEAN

2002

2003

2004

2005

2006

2007

8.0 5.0

9.1 5.6

9.5 6.2

9.9 5.6

11.1 6.0

11.9 6.5

Source: Almanac of China’s Economy, various issues.

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

China ASEAN

1996

70 60 50 40 30 20 10 0

1995

in Billion US Dollars

Figure 1.4 Trends in China-ASEAN FDI Flows, 1995-2006

Source: China Trade and External Economic Statistical Yearbook, 2008; ASEAN Secretariat website, http://www.aseansec.org


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Mutual Investment Moving to China-ASEAN investment relations, ASEAN countries, which mainly refer to Singapore, Malaysia, Thailand, the Philippines and Indonesia, started to invest in China since the 1980s. ASEAN investment in China peaked in 1995 according to contractual value, and was followed by a continued slide. Under the impact of the ASEAN financial crisis, ASEAN investment in China has shrunk further. In 2000, ASEAN countries invested approximately US$3 billion in China, which was only 27 per cent of the figure in 1995. In 2001, ASEAN investment displayed a recovery growth with a contractual value of about US$3 billion, up by 9.6 per cent over the previous year and accounting for about 5 per cent of the total China-bound investment. By the end of 2006, the accumulated direct investment of ASEAN countries in China reached $42.6 billion. The top three ASEAN investors are Singapore, Malaysia and Thailand. Of this, Singapore’s investment in China totaled $30 billion, accounting for 70 per cent of ASEAN’s total direct investment in China. Table 1.6 ASEAN’s FDI to China, 1997-2007 (Unit: US$ billion) Year Total amount

1995 2.65

1996 3.18

1997 3.43

1998 4.22

1999 3.29

2000 2.85

Year Total amount

2002 3.26

2003 2.93

2004 3.04

2005 3.12

2006 3.35

2007 3.99

2001 2.98

Source: China Statistical Yearbook, various issues. Figure 1.5 ASEAN’s Share of Total FDI Inflow to China, 1997-2005 10 9

share in percent

8 7 6 5 4 3 2 1 0

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: ASEAN Secretariat website, http://www.aseansec.org; Ministry of Commerce of People’s Republic of China, http://mofcom.gov.cn


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By comparison, China’s investment in ASEAN is much smaller than ASEAN’s investment in China, which obviously demonstrates the severe unbalance of investment between China and ASEAN. Obviously, China’s domestic demand for capital blocked the Chinese enterprises’ investments in ASEAN in the 1980s-1990s.Though Chinese enterprises started late in making investments in ASEAN countries at a low level, it grew rapidly. China’s investment in ASEAN countries in 2000 totaled US$120 million, a 60 per cent increase over 1999. The figure rose to US$190 million in 2001, again increasing by nearly 60 per cent. By the end of 2003, China had set up a total of 857 enterprises in ASEAN countries with a total investment of US$941 million, and rose to US$1.8 billion by the end of 2005. From 2002 to 2006, China’s investment in ASEAN only accounted for 1.35 per cent of the foreign direct investment that ASEAN had absorbed, and stood at a low level in comparison to FDI flows from other ASEAN main dialogue partners such as EU, Japan, United States and Republic of Korea. Obviously, there is still great potential for mutual investment growth. Figure 1.6 Shares of FDI Flows to ASEAN from ASEAN’s Dialogue Partners, 2002-2006 30

26.32

in percent

25 18.04

20 15

8.04

10 5

1.96

1.35

Rep of Korea

China

0 EU

Japan

US

Source: ASEAN Secretariat website, http://www.aseansec.org

Sub-regional Economic Cooperation Greater Mekong Sub-region Economic Cooperation (GMS) Under the framework of China-ASEAN economic cooperation, ChinaASEAN sub-regional economic cooperation programmes such as the


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Greater Mekong Sub-regional economic cooperation programme has been implemented since 1992, and now the emerging Pan-Baibu Gulf economic cooperation is becoming the heated topic in China-ASEAN economic cooperation. The “Greater Mekong Sub-region Economic Cooperation (GMS)” is a comprehensive development mechanism which has been supported by the Asian Development Bank and was established in 1992. It is one of the largest and most effective cooperative mechanisms to promote subregion cooperation in the Mekong River Basin. Greater Mekong Subregion programme comprises a GMS leaders’ Summit, a Ministerial-level Conference and sectoral working groups and forums. In 1992, in response to the strategy by Asian Development Bank, the six countries in the Greater Mekong Sub-region held the first ministerial meeting and jointly initiated the GMS economic cooperation mechanism in order to enhance economic relations among these countries. The GMS ministerial meeting has been held once a year in principle, while the leaders’ Summit has been held once in three years. The first leaders’ Summit was held in Phnom Penh, Cambodia, in November 2002, while the second Summit was held in Kunming, People’s Republic of China, in July 2005, and the Third summit meeting of the Greater Mekong Sub-region (GMS) was held in Vientiane, Lao PDR, in March 31, 2008. GMS cooperation is project-oriented and provides financial and technological support for the actual needs of member countries of the region. Since its initiation, GMS cooperation has concentrated on five strategic fields, namely, infrastructure construction, cross-border trade and investment participated by private sectors, human resource development, environmental protection and sustainable utilization of natural resources. Till the end of 2007, US$10 billion had been spent on 180 cooperation projects in nine key fields, namely, Transportation, Energy, Telecommunications, Environment, Agriculture, Human resource development, Tourism, Trade facilitation and Investment. They are lending great momentum to the economic and social development of GMS countries. Of these cooperation projects, 34 were investment projects costing a total of US$9.87 dollars, of which US$3.426 billion was supplied by ADB and US$2.98 billion and US$3.466 billion was supplied by GMS members and other development partners respectively. The other 146 projects were technological aid projects that cost a total of US$166 million, of which US$75.79 million was granted by ADB. Since its inception in 1992, the GMS has developed into one of the fastest growing regions of the world, with an average gross domestic product of over 6 per cent in recent years.


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Trade between Five GMS Countries and China In GMS economic cooperation, the growing volume of bilateral trade between fives GMS countries and China is a fruitful achievement. Total trade between China and the five GMS countries grew at an average rate of 27 per cent per annum from US$9.98 billion in 2000 to US$53.01 billion in 2007. The five GMS countries’ exports to China represent about half of total trade and grew at an average rate of 26 per cent per annum during 2000-07, while imports from China rose by 29 per cent per annum during the same period.3 The export structure from five GMS countries to China is highly concentrated on a small number of product groups, accounting for 87 per cent of all exports in 2007. The largest export products are machinery and mechanical appliances and electrical machinery, representing about half of total exports, followed by mineral fuels, rubber, plastics, chemicals and woods. Certain agricultural products including vegetables and fruits are also among the major exports from the five GMS countries to China, in spite of their much smaller share (4 per cent). Table 1.7 shows that the volume of top ten export products has risen dramatically over the last seven years (from $4.75 billion in 2001 to $12.1 billion in 2004 and $23.1 billion in 2007), and their relative share has increased from 81 per cent in 2001 to 88 per cent in 2007. The five GMS countries’ imports from China are concentrated in manufacturing and industrial products, as shown in Table 1.8. The major import products, which accounted for 67.5 per cent of total imports in 2007, include machinery and mechanical appliances, electrical machinery, iron and steel, vehicles, mineral fuels and oils, cotton and fabrics and chemicals and fertilizers. Machinery, mechanical appliances and electrical machinery accounted for more than a third of total imports in 2007. This means that five GMS countries and China have a high level of intra-industry trade. Thailand is the largest importer of Chinese goods among five GMS countries. In 2007, Thailand imported $11.98 billion of goods from China, or about 45 per cent of total five GMS imports. The largest import product groups are machinery and electrical appliances, iron and steel, base metals, chemicals, plastics and vehicles. Vietnam was the second largest importer of goods from China (among five GMS countries), with imports valued at $11.91 billion, or 44 per cent of five GMS imports. Machinery and electrical appliances are the top imports, followed by iron and steel, mineral fuel, vehicles and fertilizers. Vietnam also imports a significant amount of cotton and fabrics from China and these imports are used as inputs for export oriented garment production. Myanmar accounts for the next largest share of imports from China, followed by Cambodia and Lao PDR. Their import structures are very similar to that of Vietnam.


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Machinery & mechanical appliances

Electrical machinery

Mineral fuels and oils

Rubber

Plastics

Organic chemicals

Wood and articles of wood

Edible vegetables

Ores, slag and ash

Edible fruit

84

85

27

40

39

29

44

07

26

08

5,901

All Products

Source: Global Trade Atlas 2007.

1,150

4,750.4

130.1

33.5

139.7

244.3

104.8

666.4

465.8

1,071.9

918.3

975.1

2001

Others

Total top 10 export items

Description

HS Code

14,272

2,162

12,109

214.6

130.3

326.8

456.5

344.1

1,223.7

1,155.0

2,426.7

2,984.6

2,846.9

2004

Value

26,373

3,283

23,089

369.7

436.0

649.6

762.2

1,357.4

1,641.3

2,297.1

2,506.0

5,818.3

7,251.6

2007

141.9

87.9

154.9

69

289

134

87

22.8

84

148

12.6

22.9

192

84.8

51.9

90.7

72

234

99

67

294

34

99

3

95

155

346.9

185.4

386.1

184

1200

365

212

11.95

146

393

134

534

644

100

19.5

80.5

2.2

0.6

2.4

4.1

1.8

11.3

7.9

18.2

15.6

16.5

2004/01 2007/4 2007/01 2001

Periodical Change (%)

Table 1.7 Structure of Export from GMS5 Countries to China (in US$ million)

100

15.2

84.8

1.9

0.9

2.3

3.2

2.4

8.8

8.1

17.0

20.9

19.9

2004

Share (%)

100

12.5

87.5

1.4

1.7

2.5

2.9

5.1

6.2

8.7

9.5

22.1

27.5

2007


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Articles of iron and steel

Cotton

Fabrics

Organic chemicals

Fertilizers

73

52

60

29

31

86.9

130.3

56.2

149.5

95.2

303.0

Source: Global Trade Atlas 2007.

4,822.3

Mineral fuels and oils

27

528.1

All Products

Vehicles

87

205.5

1,608.3

Iron and steel

72

730.3

Others

Electrical machinery

85

998.5

3,283.9

Machinery & mechanical appliances

84

2001

Total top 10 import items

Description

HS Code

4,822.3

1,608.3

3,283.9

486.9

229.7

219.4

406.7

323.1

797.2

330.3

1,231.7

1,718.4

1,973.5

2004

Value

26,634

8,651.8

17,982

588.7

646.8

677.9

739.2

771.2

997.3

1,054.7

3,611.5

4,091.8

4,803.5

2007

136.1

144.1

132.2

460

70

290

172

144

163

-37

499

139

98

130.6

120.4

135.8

21

182

209

82

232

25

219

193

138

143

444.4

437.9

447.6

577

396

1105

394

710

2295

100

1657

460

381

100.0

32.9

67.1

1.8

2.7

1.1

3.1

1.9

6.2

10.8

4.2

14.9

20.4

2004/01 2007/4 2007/01 2001

Periodical Change (%)

Table 1.8 Structure of Import of Five GMS Countries from China (in US$ million)

32.5

67.5

2.2

2.4

2.5

2.8

2.9

3.7

4.0

13.6

15.4

18.0

2007

100.0 100.0

34.0

66.0

4.2

2.0

1.9

3.9

2.0

6.9

2.9

10.7

14.9

17.1

2004

Share (%)


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Chinese Investments in the Five GMS Generally, Chinese investments in the five GMS countries are mostly in the energy and transport sectors as well as agribusiness and tourism industries. For example, in Lao PDR, Chinese rubber companies such as the Ruifeng Rubber Company had invested about US$20 million to set up rubber plantations in the northwest Luang Namtha province since 2004.4 It was also reported that the Lao government had awarded the contract of building a casino in Bo Ten, a small town located in Luang Namtha province to attract tourists using the recently built Route 3 highway, to a Chinese company. Furthermore, the Suzhou Industrial Park Overseas Investment Co was granted a deal by the Lao government to build a sports stadium for the Southeast Asian Games that the country will host in 2009. This project is facilitated by a loan given by the China Development Bank. The Lao government also announced in September 2007 that the same Chinese firm is teaming up with another two Chinese companies to embark on the “New City Development Project”, an ambitious plan endorsed by Vientiane to transform 4,000 acres of rice fields located in the Luang Namtha province into “a modern city” with “Manhattanlike skyline”.5 In Cambodia, Chinese companies are investing in the country’s energy industry. For example, China is funding the construction of four hydropower plants in Cambodia, including the US$280 million 193 MW Kamchay hydropower station by China’s Sino-Hydropower Corp. The Kamchay plant is the largest investment project in Cambodia to date.6 In addition, China National Overseas Oil Corp is in joint venture with Cambodia’s National Petroleum Authority to exploit the country’s gas reserve along the coast of Cambodia. Besides the energy sector, Chinese companies are pumping investments into the agro-industry sector. For instance, China Cooperative State Farm Croup and Cambodia’s pulp-and-paper producer Pheapimex are investing more than US$70 million to establish pulp plantations in Kompong Chhnang and Pursat provinces while Chinese firm Green Rich plans to establish an acacia plantation in Koh Kong province. In Myanmar, Chinese fishing companies are making headway into the country’s fishery industry as they catch fishes along the Andaman Sea coast before transporting them back to markets in Yunnan province through the central Myanmar city of Mandalay and the remote northeast Shan state via road and rail links which were built with “no-strings attached” Chinese loans. In addition, a Chinese consortium headed by the partly State-owned Shanghai Jinqiao Export Processing Zone Development Company is setting up a special economic zone near Yangon’s Thilawa port and helping to build deepwater


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ports in Tilowa and Rakhain. Furthermore, Chinese oil and gas companies such as China National Petrochemical Corp, Petro China and China National Offshore Oil Corp are setting up joint ventures with local oil companies and pumping billions to tap into the country’s oil and gas reserves in the Andaman Sea. They are also constructing pipelines from these offshore platforms to Yunnan province. One example is the US$2 billion gas pipeline from Sittwe which is scheduled for completion in 2009. Following the footsteps of these big Chinese companies, smaller Chinese private firms such as the Yunnan Machinery and Equipment Import and Export Company are selling equipment, and acquiring loans from the Chinese government, to build hydropower plants in Myanmar. They are also setting up factories, stores and farms in cities such as Mandalay and Yangon. Finally, private and State-owned Chinese firms are also increasing their investment in Vietnam. Similar to Chinese investors in the aforementioned GMS countries, their investment strategy is to develop the country’s energy and transportation sectors. Some of these projects include the US$710 million Cao Ngan thermal-power station, the US$340 million Hanoi – Ha Dong railway project and the US$130 million project to upgrade the railway signal system in northern Vietnam and on the Vinh – Ho Chi Minh city railway line. In addition, Chinese oil companies such as the China National Offshore Oil Corp are setting up joint ventures with Vietnamese oil companies to explore for oil and gas in the Tonkin/Beibu Gulf.7 It can be seen that since the second GMS summit in 2005, the bilateral trade between China and the other GMS countries has maintained a good development trend while enjoyed an improved trade structure and the volume of bilateral investment has also experienced rapid growth. China has undertaken labour service contracting and design consultation in the other five GMS countries and has realized higher contract values and larger turnovers each year. China has also participated, in the form of joint ventures or wholly Chinese-owned enterprises, in development and construction of the economic and trade cooperation zones in Cambodia, Thailand and Vietnam and in this way advanced local economic development. Pan- Beibu Gulf Economic Cooperation If GMS focuses on mainland economic cooperation between China and ASEAN, Pan-Beibu Gulf economic cooperation represents the newest strategy for sub-regional cooperation between China and ASEAN, which focuses on promoting sub-regional cooperation in the Pan-Beibu Gulf,


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covering Southern coastal provinces of PRC, Viet Nam and the oceanic countries of ASEAN including Brunei, Indonesia, Malaysia, the Philippines, and Singapore. One important point of complementarities of the Pan-Beibu Economic Cooperation is its emphasis on maritime-based cooperation. Improving ocean-going trade, port development, and maritime-related private sector investment will complement the GMS efforts to promote connectivity over land. Guangxi Beibu Gulf Economic Zone, which sits at the southwestern end of China’s coastal area, mainly consists of four cities, that is, Nanning, Beihai, Qinzhou and Fangchenggang, with a landmass of 42,500 square kilometers and a population of over 12 million. To its east is Pearl River Delta; to its south, Beibu Gulf; to its back, southwest China; and to its front, Southeast Asia. Standing at the convergence of South China economic rim, Southwestern China economic rim and ASEAN economic rim, linking the east, middle and west China, BGEZ plays an irreplaceable role in regional cooperation like PPRD (Pan-Pearl River Delta), PBG and between China and ASEAN. As the only area accessible to sea in west China, BGEZ is regarded as the most convenient gateway to the sea for Southwest China, a crucial bridge and base for enhancing comprehensive cooperation between China and ASEAN and the frontline and key doorway linking China with ASEAN and the rest of the world. Pan-Beibu Gulf economic cooperation was first jointly launched by ADB, the Leading Office of Western Development Program of China and Guangxi Zhuang Autonomous Region. The first Pan-Beibu Gulf Economic Cooperation Forum was held in July 2006 in Nanning, Guangxi, in which Guangxi put forward the proposal of building the Pan-Beibu Gulf economic cooperation zone, an area surrounded by south China’s Guangdong, Hainan provinces and Guangxi, as well as the six ASEAN members of Singapore, Malaysia, Indonesia, the Philippines, Vietnam and Brunei. Further proposed was the cooperation concept of “One Axis, Two Wings” in the second PanBeibu Gulf Economic Cooperation Forum in 2007. “One Axis” refers to the Nanning-Singapore economic corridor. Of the “Two Wings”, one refers to Pan Beibu Gulf economic cooperation and the other refers to Greater Mekong Sub-regional cooperation. The strategic idea of Pan-Beibu Gulf economic cooperation is conducive to forming a new pole of economic growth in the region, which drew great interest and active response from ASEAN leaders, including Vietnam Prime Minister Nguyen Tan Dung, Philippine President Gloria Macapagal Arroyo and Singapore Prime Minister Lee Hsien Loong who highly hailed PBG’s significant role in regional economic cooperation.


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Enhanced Mutual Political Relations With China’s recent rise, China’s traditionally conceived image as a threat to the neighbouring ASEAN countries has once again been enhanced in terms of both economic power and military power. In this context, the economic engagement between China and ASEAN has been easily and intentionally considered in some extent as an aspect of strategy of Chinese expansion in ASEAN, which is a hurdle to mutual political confidence between the two sides. However, with the development of economic cooperation between China and ASEAN, China’s political relation with ASEAN has significantly improved since the 1990s. By 1991, China established diplomatic ties with all the members of ASEAN. It became ASEAN’s all-around dialogue-partnership country in 1996. During the period 1997-2002, China-ASEAN relations moved towards Good Neighbourliness and Mutual Trust. Currently, China and ASEAN are bent on cementing a “strategic partnership oriented to peace and prosperity”. The establishment of a strategic partnership for peace and prosperity will lay a solid foundation for the long-term ASEAN-China dialogue partnership. China has established a multi-level and regular dialogue mechanism with ASEAN with the “ASEAN plus China summit” (10+1) as the core, which demonstrates that ASEAN countries have put ASEAN-China relations in a more prominent position and the China-ASEAN relations has ushered into a new stage characterized with dialogue, cooperation and common development. In regard to political confidence and security cooperation, China has entered a number of political declarations and agreements with ASEAN in the previous years. These include the Joint Declaration of ASEAN and China Cooperation in the Field of Non-Tradition Security Issues and the Declaration on the Conduct (DOC) of Parties in the South China Sea, which were concluded at ASEAN-China Summit in 2002 in Phnom Penh, Cambodia. The signing of the DOC signaled the desire of both ASEAN and China to promote trust, confidence and cooperation and to agree on a regional code of conduct in the disputed area. China’s accession to the treaty provided further reassurance for the peace and security of the region. In addition, China was the first dialogue partner to accede to the Treaty of Amity and Cooperation in South-East Asia at the meeting of ASEAN-China Summit in October 2003 in Indonesia. China has also reiterated its willingness to work with ASEAN for the early signing of the Protocol to the Treaty on Southeast Asia Nuclear Weapon-Free Zone. In the era of economic globalization, regional economic integration is becoming the unavoidable trend, which is not only conducive to regional


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economic development, but also helpful to mutual confidence-building among the relevant countries or regions. China and ASEAN experiences demonstrate that economic engagement and interdependence could be a reliable and agreeable instrument to mutual political confidence-building. Notes * Dr Shi Xueqin, Associate Professor in the School for Southeast Asia Studies, Xiamen University. She Holds a PhD in Southeast Asia History Studies from Xiamen University (2004). Her main research interests focus on the modern history of Southeast Asia, religion and regional migration. ** Ms. SENGMANIVONG Keooudone, Officer of Lao People’s Revolutionary Youth Union. She holds a masters degree in international relations from Xiamen University (2009) on the economic integration of Greater Mekong Sub-Region. 1. In 2007, ASEAN-China bilateral trade has gone up to US$202.51 billion, following EU (US$356.2), US (US$302.1), Japan (US$236.0), becomes the fourth biggest trade partner of China. See http://yzs.mofcom.gov.cn/aarticle/g/ date/k/200802/20080205366505.html 2. http://www.aseansec.org/Stat/Table20.pdf 3. Global Trade Atlas 2007. 4. Brian McCartan, “China Rubber Demand Stretches Laos”, Asia Times, 19th December 2007. 5. Dennis D. Gray, “Laos Fear China’s Footprint”, Associated Press, 6th April 2008. 6. David Fullbrook, “China’s Growing Influence in Cambodia”, Asia Times, 6th October 2006. 7. A closer study on the areas where Chinese firms are investing in the GMS countries revealed that they are well located within the North-South Corridor of the GMS economic programme. Furthermore, these areas are linked to the roads and most of the transportation linkages built in the corridor actually connect these investment projects to China.

References Almanac of China’s Economy, China Statistical Press, various issues. ASEAN Secretariat Website http://www.aseansec.org ASEAN-China Export Cooperation, 2001. Asia Times. Asian Development Bank, “Building on Success: A Strategic Framework for the Next Ten Years of the Greater Mekong Subregion Economic Cooperation Program”, November 2002. Associated Press.


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China Trade and External Economic Statistical Yearbook, China Statistical Press, various issues. “Forging Closer ASEAN-China Relations in the 21st Century”, a report submitted by ASEAN-China Export Cooperation, 2001. Global Trade Atlas 2007. Lim Tin Seng (2008), “China’s Active Role in the Greater Mekong Sub-region: A “Win-Win” Outcome”, EAI Background Brief No. 397, 6th August. Wong, John (2006), “ASEAN-China Relations: The Economic Perspective”, Foreign Affair Review (Beijing), No. 89, June.


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FTAs, China, the ASEAN Charter and the ASEAN Economic Community ♦ 33

Chapter 2 FTAs, China, the ASEAN Charter and the ASEAN Economic Community Teng Siow Song*

Introduction Free trade agreements (FTAs) or Economic Partnership Agreements (EPAs) connect countries to new markets and help economies expand trade with existing markets. With FTAs, exporters and investors stand to enjoy a myriad of benefits like tariff concessions, preferential access to certain sectors, faster entry into markets and Intellectual Property (IP) protection. The ASEAN Free Trade Agreement (AFTA) was signed in 1992 and aims to make trade among ASEAN countries more effective. With the AFTA signed and trade liberalization targets and deadlines set among the various ASEAN members, the ASEAN Charter, the vital document that makes ASEAN an entity with a legal personality first endorsed in late 2007 by all ten ASEAN leaders, is the next important agreement to reach. The Charter once ratified, will allow ASEAN in theory to enjoy the reputation, standing and respect, similar to that of the European Union (EU) at the international stage. The proposed ASEAN Economic Community (AEC), though not an FTA itself, will help further institutionalize and make cooperation among AFTA members more systematic and smooth. The AFTA could operate more efficiently if the proposed AEC 2015 takes shape. However, there are numerous challenges along the way in the negotiations of free trade agreements and the related after effects etc. This chapter will attempt to discuss and explore some of the major contemporary issues and challenges of FTAs/ EPAs/ RTAs, and also point out the fact that with the demise of the WTO trade talks, the world including East Asia will see a proliferation of more regional based trade agreements, and in order to compete effectively, ASEAN needs the ASEAN Charter and the AEC, to be up and running as soon as possible. 33


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34 ♦ Teng Siow Song

Background The Association of Southeast Asian Nations or ASEAN was established on 8th August 1967 in Bangkok by the five original member countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8th January 1984, Vietnam on 28th July 1995, Lao PDR and Myanmar on 23rd July 1997, and Cambodia on 30th April 1999. In the early years, the main purpose of ASEAN was to serve as a regional security and political framework among its members against communism in Southeast Asia. The association slowly diversified itself into all aspects of regional and international cooperation. The ASEAN Economic Community (AEC) is not a new concept and was first initiated at the 9th ASEAN Summit in Bali in 2003 by the leaders of ASEAN, as part of the wider ASEAN Community comprising three pillars, namely, ASEAN Security Community, ASEAN Economic Community and ASEAN Socio-Cultural Community; the initial target was to establish the AEC was by 2020.1 However, in November 2007 during the 13th ASEAN Summit held in Singapore, the target year for the creation of the AEC was pushed forward; ASEAN leaders finalized and signed the Declaration on the Blueprint for the AEC, which will serve as the roadmap for transforming ASEAN into a single market and production base that is highly competitive and fully integrated into the global community by 2015. The ultimate end-goal is to achieve ASEAN 2020, where there would be a free flow of skilled labour, trade, investments, capital, equitable development, reduction in poverty and socio-economic disparities within ASEAN Our ten ASEAN members are fortunate to have forged the ASEAN Free Trade Agreement (AFTA) in 1992. The China-ASEAN Free Trade Agreement (CAFTA) is set to officially take effect in 2010. Since the 1990s the world has been witnessing a strong trend, especially in the developed countries, to form regional trading blocs, such as the European Union (EU) and the North American Free Trade Area (NAFTA). The formation of these trade blocs has led to substantial diversion of trade and investment away from the rest of the world economy affecting the growth process in other regions that are not part of these blocs. Most Asian countries on the other hand have faithfully pursued multilateralism in their trade and investment policy except for a few sub-regional attempts such as the ASEAN Free Trade Area (AFTA) or the South Asia Free Trade Agreement (SAFTA). However, there is now a growing recognition in Asia of the importance of regional economic integration for generating growth impulses from within, especially in the wake of the Asian Financial Crisis. The surge in free trade agreements (FTAs) in East Asia since the Asian


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financial crisis has prompted a lively debate on the characteristics, impact, and future of FTAs in the region. Economic Integration and FTA in East Asia Free trade agreements (FTAs) or Economic Partnership Agreements (EPAs) connect countries to new markets and help economies expand trade with existing markets. With FTAs, exporters and investors stand to enjoy a myriad of benefits like tariff concessions, preferential access to certain sectors, faster entry into markets and Intellectual Property (IP) protection. Over the past few decades, East Asia’s trade and FDI have expanded rapidly with exports rising from 14 per cent of world total exports in 1980 to 27 per cent in 2006; corresponding imports rose from 15 per cent to 24 per cent from 1980 to 2006.2 FDI inflows into East Asia grew from 5 per cent of world total FDI inflows in 1980 to 16 per cent in 2005 while East Asian FDI outflows rose from 5 per cent to 11 per cent of world total outflows over the same period.3 It makes sense for ASEAN and East Asia countries to integrate closer together so as to be able to have more effective trading and investment environments. Figure 2.1 shows the evolution of economic integration. The European Union is basically at the economic union stage whereas ASEAN is at the free trade area stage. Figure 2.1 Evolution of Economic Integration

Economic Union – Common market status plus harmonization of fiscal and monetary policies Common Market – Customs union status plus free movement of labour & capital Customs Union – Free trade among members and adoption of common external trade policies Free Trade Area – All trade barriers in goods removed among members, but each retains own barriers with rest of the world Preferential Trading Area – Lower trade barriers among members

Source: Asian Economic Cooperation and Integration: Progress, Prospects & Challenges, ADB, 2005.


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8.6 17.9 22.7 30.2 36.8 34.6 40.5 33.8 11.1 60.7 61.5

NIEs ASEAN ASEAN+4 ASEAN+3 ASEAN+3 + HK + Taiwan (China) ASEAN+6 ASEAN+6 + HK + Taiwan (China) NAFTA MERCOSUR Old EU New EU

9.2 20.3 27.2 30.2 39.0 34.8 42.7 38.7 7.2 59.8 60.0

1985 11.9 18.8 33.0 29.4 43.1 33.7 46.3 37.9 10.9 66.2 66.8

1990 15.5 24.0 39.1 37.6 51.9 40.8 54.5 43.1 19.2 64.2 66.9

1995 15.5 24.7 40.6 37.3 52.1 40.5 54.6 48.8 20.3 62.3 66.3

2000 15.3 24.1 41.1 37.1 51.9 40.6 54.5 49.1 17.9 62.2 66.7

2001 15.8 24.4 43.4 37.9 53.8 41.3 56.3 48.4 13.6 62.5 67.4

2002 15.2 26.6 44.7 39.0 55.4 42.4 57.5 47.4 14.7 63.0 68.1

2003 14.6 26.7 45.2 39.2 55.9 43.0 58.5 46.4 15.2 62.2 67.6

2004 13.9 27.2 45.5 38.9 55.4 43.1 58.4 46.1 15.5 60.4 66.2

2005

13.6 27.2 45.8 38.3 54.5 42.6 57.6 44.3 15.7 59.5 65.8

2006

NB: 1) Intra-regional trade share is computed as Xii / [(Xiw + Xwi) / 2 ], where Xii is the value of intra-regional exports, Xiw is the value of total exports of the region to the world; Xwi is the value of total exports of the world to the region. 2) NIEs = Hong Kong (China), Korea, Singapore, Taiwan (China). 3) ASEAN = Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. 4) ASEAN+4 = ASEAN + China, HK, Taiwan, Korea. 5) ASEAN+3 = ASEAN + China, Korea, Japan. 6) ASEAN+6 = ASEAN + 3 + India, Australia, New Zealand. 7) NAFTA = USA, Canada, Mexico. 8) MERCOSUR = Brazil, Argentina, Paraguay, Uruguay, (Venezuela to join), (Associate members: Bolivia, Chile, Colombia, Ecuador, Peru), (Observer: Mexico). 9) Old EU = 15 members. 10) New EU = 27 members. Source: ADB & IMF Direction of Trade 2007.

1980

Region

Table 2.1 Intra-Regional Trade Shares, 1980-2006 (%) 36 ♦ Teng Siow Song

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5.93

159.53

Cambodia

Indonesia

157.40

251.53

203.90

105.20

Philippines

Singapore

Thailand

Vietnam

57.8

29.8

15.1

13.0

26.5

63.9

34.6

48.2

30.4

-33.1

25.8

84.52

77.36

150.02

43.08

100.67

1.42

81.01

5.76

8.93

0.59

553.35

Source: China-ASEAN Free Trade Area: 2008 Quarterly Report.

259.80

Malaysia

1.93

12.08

Myanmar

Laos

0.60

1,157.89

Brunei

ASEAN

63.4

39.9

11.1

26.4

30.5

86.1

38.8

51.9

9.8

29.3

30.3

20.67

126.55

101.51

114.31

159.13

0.51

78.52

0.17

3.15

0.02

604.54

38.5

24.4

21.4

8.7

24.1

22.8

30.6

-18.3

177.6

-96.6

21.9

Item Import + Export Export Import Nation/ Amount Increase Amount Increase Amount Increase Region (100 mil.) (%) (100 mil.) (%) (100 mil.) (%)

Table 2.2 Trade Statistics of ASEAN Countries with China, January-June 2008

63.85

-49.19

48.51

-71.23

-58.46

0.92

2.49

5.59

5.77

0.57

-51.19

2008

36.81

-46.47

51.38

-71.06

-51.13

0.35

-1.73

3.58

6.99

0.01

-71.27

2007

Trade Balance (100 million) FTAs, China, the ASEAN Charter and the ASEAN Economic Community ♦ 37

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Table 2.1 shows the gradual growth of intra-regional trade between members of various regions of the world. As we can see from the table since 1980, intra-regional trade has growth substantially and this supports the notion that it is in the best interest of regions to free up their trade more quickly. More data can be found in the appendices. Table 2.2 shows China’s recent trade balances with the ten members of ASEAN and ASEAN as a whole from January to June 2008. China enjoys a US$5.1 billion trade surplus with ASEAN collectively for this time period and ASEAN as a whole, suffers a trade deficit of US$5.1 billion with China respectively. The value of ASEAN-China trade has tripled from about US$59.6 billion in 2003, to US$171.1 billion in 2007. ASEAN-China total trade has been growing at an annual rate of 30 per cent from 2003 to 2007. The average growth in ASEAN exports to China is 28 per cent with imports from China at 32 per cent during the same period. Cumulative FDI flows from China into ASEAN from 2003 to 2007 amounted to US$3.6 billion.4

na Ch i

Si ng ap Ta or iw e an ,C hi na In do ne sia M al ay sia Ph ilip pi ne s Th ai la nd Vi et na m

Ko ng ,S Ho ng

Ko re a

600 500 400 300 200 100 0

AR

US$ Billion

Figure 2.2 Selected East Asian Economies’ Inflow FDI, 1995-2005 (US$ billion)

Source: UNCTAD, World Investment Report 2006; IMF, China Statistical Yearbook.

Main Players Involved The WTO One issue that needs to be looked at is the World Trade Organization (WTO) related elements, and the negative aspects of the FTAs that need to


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be minimized. The consolidation of multiple and overlapping FTAs into a single East Asian FTA can help mitigate the harmful “noodle bowl” effects of different rules of origin (ROOs) and standards. For such consolidation to occur, ASEAN must act as the regional “hub” by further deepening and speeding up ASEAN economic integration (AEC 2015)5, the ASEAN plus-three countries (China, Japan, and Korea) need to collaborate more closely as well. Furthermore, substantial international support is required to strengthen the supply-side capacity of poorer ASEAN countries – including the building of trade-supporting infrastructure (transport, energy, and telecommunications) – so that they can take advantage of integrated regional markets and narrow development gaps within ASEAN. Over time, it would be desirable for East Asia to strengthen economic ties with North America and Europe by connecting an ASEAN+3, JACIK (ASEAN+4), then ASEAN+6 FTA with NAFTA and the EU. FTAs, particularly multiple, overlapping ones, carry the risks of going against the WTO Doha round and creating negative “noodle bowl” effects. If such risks are significant, many questions arise: What should be done to minimize such risks? How can East Asia ensure that the region’s FTAs can become a stepping stone toward global integration? If the benefits of consolidating Asian “noodle bowls” into a single East Asian FTA are large, how should this be achieved? Should East Asia aim for a single FTA based on ASEAN+3 (comprising the ten ASEAN members plus PRC, Japan, and Korea) or ASEAN+6 (or the East Asia Summit group comprising ASEAN+3, Australia, New Zealand, and India)? What about East Asia’s relationship with North America and Europe6? Former WTO director-general Supachai Panitchpakdi had expressed concern that “there was a real threat today of regional trade arrangements (RTAs) overtaking the tedious multilateral negotiations under the WTO. Too much energy spent by nations on signing RTAs could slow down the progress at the WTO.” However, Supachai did admit that RTAs done in a calibrated way, could act as building blocks for the multilateral WTO free trade framework.7 WTO Failure With the recent failed WTO trade talks in Geneva in July 2008, the seven-year log jam of the so-called Doha Round of trade discussions look set to remain a deadlock till at least 2009, before any chance of another WTO meeting for negotiations is possible. The Doha Round collapsed after China and India insisted on having the right to re-impose tariffs – or raise them – if there


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were a surge in food imports. In terms of the impact on economic growth, the issues at stake in the round were fairly small compared to the global-warming debate. Limiting the rise of greenhouse gases could hit growth by forcing industry to retool factories and consumers to alter lifestyles. That sacrifice could prompt an even fiercer reaction from New Delhi and Beijing. The developing world represented mainly by China, India and Brazil, disagreed with the developed countries over the so-called special safeguard mechanism (tariffs imposition); the West mainly represented by the United States, insisted that extra duties should be imposed only if imports surged by 40 per cent. However, if imports laterally surged by 40 per cent or more, most developing countries’ economies (particularly agriculture) would have been decimated. Both the United States and India are facing elections later this year and neither governments nor soon-to-be governments and political parties, want to give or appear to be giving too much economic and trade concessions to one another, so as not to upset potential voters. Under WTO regulation, all 153 members must agree on a deal. In practice, only the economically important players get a real say. No African country was among the seven nations that conducted most of the negotiations. The issue of American cotton subsidies, which is of vital interest to Africa’s cotton-producing nations was not even discussed. The failure of the talks is unlikely to have immediate big effects on world trade or global economic growth. Outside of agriculture and textiles, trade barriers generally are low globally because of decades of tariff cutting. But the consequences of the failure were still significant because of the message about the difficulty in reaching global agreements. It seems that the world’s poorest countries stand to lose the most from the failed trade talks.8 United States and European Union The US and EU have certainly expressed concern and anxiety over the proliferation of RTAs and FTAs in Asia. For example, when India and Singapore concluded the Comprehensive Economic Cooperation Agreement (CECA) in June 2005, former British Prime Minister Tony Blair led an EU team to India in his capacity as the president of the EU and expressed concern that the EU in general and United Kingdom in particular, will be at a big disadvantage at the expense of the CECA. Blair was particularly anxious that Singapore banks will have far greater access to the Indian market than European banks. The Singapore agreement encompasses trade in goods and


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services and gives pre-establishment investment guarantee to Singapore firms. The EU wanted a piece of the action for obvious reasons. Recent statistics showed that in 2005, India’s trade with the EU was 19 per cent of its total merchandise trade; North America’s trade with India was 13 per cent; and ASEAN plus China, Japan and Korea’s trade with India was 20 per cent. The prospects of an even larger East Asian/ Asian wide FTA that will potentially open up freer trade among Asian countries, worries the US & EU. This has to be taken into consideration. Japan Until recent times, most Japanese consider the inclusion of India into the ASEAN+3 as a potential political and economic counterbalance to China’s influence within the ASEAN+3 framework. The Japanese government has put in tremendous effort in revitalizing the Japan-India relationship.9 India too, has adopted a “Look East” policy in vitalizing its relation with China, Japan and Korea (and the rest of ASEAN). Against that backdrop, the case for an Asian Economic Community (that would be broader in coverage than all existing programmes for economic cooperation in the region) comprising Japan, ASEAN, China, India and Korea (JACIK), has been put forward. It is argued that JACIK could provide the initial core group that can be expanded to cover other parts of Asia subsequently, as in Europe. China During 2001-2007 China signed nine free-trade agreements (FTAs) with 27 countries, along with 334 regional trade co-operation deals. One example is China’s growing FTA relationship with the Association of South-East Asian Nations (ASEAN), which began in 2002 with the Framework Agreement on ASEAN-China Comprehensive Economic Co-operation. An FTA between China and Pakistan, signed in November 2006, came into force in July 2007; the agreement provides that the two countries will reduce tariffs on 85 per cent of all products within five years. China’s talks about an FTA with India has been moving slowly, partly as a result of fears on the part of India’s industries that the South Asian nation’s markets would be flooded by cheap Chinese goods. The Indian minister of commerce and industry, Kamal Nath, said in January 2008 that he did not expect any talks between the two governments on an FTA during the year ahead. China had signed and ratified double-taxation treaties with 86 nations by February 2008. These allow investors to avoid paying taxes in both China and their country of origin.


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China has concluded bilateral agreements on investment protection with Albania, Argentina, Armenia, Australia, Austria, Azerbaijan, Belarus, Belgium, Bulgaria, Chile, Croatia, Cuba, the Czech Republic, Denmark, Ecuador, Egypt, Finland, France, Georgia, Germany, Ghana, Greece, Hungary, Iceland, Indonesia, Israel, Italy, Jamaica, Japan, Kazakhstan, Kuwait, the Kyrgyz Republic, Laos, Luxembourg, Malaysia, Mongolia, Morocco, the Netherlands, New Zealand, Norway, Oman, Pakistan, Papua New Guinea, Peru, the Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Turkey, Turkmenistan, Ukraine, the United Arab Emirates, the United Kingdom, Uruguay, Uzbekistan, Vietnam and the former Yugoslavia. Negotiations were still bogged down in early March 2008 over an investment agreement with the United States (China’s most important trading partner after Hong Kong, which re-exports many goods from China to the US). The US wants firmer guarantees for investors than are provided in China’s other bilateral agreements. Moreover, China wants to use its own courts to settle disputes, whereas the US is pressing for arbitration in a third country.10 Figures 2.3 to 2.5 demonstrate China’s rapid growth in trade, her trade balances with the main trading partners and her domestic and external demand relative to her GDP in recent times. Figure 2.3 China’s Trade Growth, 1990-2007 40%

1000

30% 28.4% 27.2% 25.7%

27.8%

800 600

35.4% 34.6%

Export Growth 31.9%

22.9%

22.4%

21.0%

20%

18.2%

18.1% 15.8%

400

Growth (%)

1200

10% 8.0%

6.1%

6.8%

0%

Import

2007

2006

2004

2005

2003

2002

2001

2000

0.5%

1999

1995

1994

1993

1992

1990

1991

Export

1997

1.5%

0

1998

200

1996

Import & Export (US$ Bil.)

1400

Export Growth

Source: China Statistical Yearbook; various compilations by author.


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Figure 2.4 China’s Trade Balance with Selected Economies (US$ billion) ASEAN Australia Thailand Indonesia Philippines Malaysia Taiw an Korea Japan Singapore HK USA EU

-100.0

-50.0

0.0

50.0

2007

100.0

150.0

200.0

2008(Jan-Jul)


Figure 2.5 Contribution of Domestic Demand and External Demand to China’s GDP Growth, 1990-2006 20% Consumption GDP

15%

Investment

10% 5% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -5% Net Export

-10%

GDP Growth

Consumption

Investment

Net Export



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Singapore’s Bilateral Trade with Malaysia In 1988 Malaysia was Singapore’s largest ASEAN trading partner and third largest overall trading partner, after the United States and Japan. The Malaysian market was the single largest ASEAN destination for Singapore’s exports and its second largest export market overall. In the late 1980s, Singapore established increasingly close economic and industrial ties with Malaysia’s Johor state. To alleviate its land shortage as well as its labour shortage and high labour costs, Singapore began to transfer labourintensive industries to sites across the causeway connecting it to Malaysia’s southernmost state. Johor, in turn, hoped “economic twinning” with Singapore would boost its long-term development. By early 1987, there were 217 Singaporean companies or Singapore-based multinationals in Malaysia, having total investments of slightly more than S$200 million. In 2000, the USA was the largest investor in Malaysia at 37.7 per cent, followed by Japan at 14.5 per cent, with Singapore third at 8.9 per cent, Taiwan at 4.6 per cent, South Korea at 3.6 per cent, and Hong Kong at 1.7 per cent. Today, Malaysia is Singapore’s largest trading partner. Singapore’s trade with Malaysia in the first six months of this year rose 11 per cent to almost S$58 billion (US$41 billion) compared with a year earlier. For the first 5 months of 2008, Singapore was Malaysia’s third largest investor, contributing some S$308 million worth of manufacturing-related investments in electronics, machinery production and non-metallic mineral products.11 Figure 2.6 shows Singapore-Malaysia trade from 1990 to 2007; trade has been growing from strength to strength. Singapore investors are encouraged Figure 2.6 Singapore’s Trade with Malaysia (S$ billion) 120

S$ Billion

100 80 60 40 20

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

0

Source: Singapore Trade Statistics, various issues.


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to tap into Malaysia’s engineering support industry to develop high-value electrical, electronics products and also invest in the services industry. To attract more foreign investment, the Malaysian government has implemented tax, land, licensing and administrative reforms. New areas of potential cooperation include investment opportunities in the Iskandar Malaysia economic development region, on which both countries have set up a joint ministerial committee to work on initiatives to facilitate bilateral cooperation, such as management to ease cross border traffic jam, etc. Singapore’s Bilateral Trade with China Bilateral trade between Singapore and China has been flourishing since the two countries established diplomatic relations in 1990. China’s late paramount leader Deng Xiaoping’s Southern Visit to Singapore in 1992 has further cemented relationship with China. In 2005, at the invitation of Premier Wen Jiabao, Prime Minister Lee Hsien Loong visited China. Such frequent high-level visits indicate the importance of the Chinese market to Singapore’s economy. Since 1997, China has been Singapore’s top foreign investment destination. Singapore’s bilateral trade with China has been increasing steadily over the years, from about S$21 billion (US$15 billion) in 2000 to S$91 billion (US$66 billion) in 2007. China is Singapore’s No.1 foreign investment destination with a cumulative contractual investment of US$52.98 billion and 14,367 numbers of cumulative projects. The entry of China into the WTO and the start of the China-ASEAN tariff reduction plan on July 20, 2005 have further opened up the Chinese market. This provides more opportunities for Singapore to improve its bilateral trade relationship with China. Today, China is Singapore’s third largest trading partner, after Malaysia, the EU and the US. With a cumulative contractual investment value of US$52.98 billion as at 2005, Singapore is China’s 7th largest investor and 8th largest trade partner. The number of Chinese firms in Singapore also grew from 509 (1999) to 1,161 (2003). As of October 2005, there are also 89 Chinese companies listed in Singapore. Figure 2.7 compares the economic growth rates of Singapore and China from 1981 to 2007. As we can see, the Chinese economy is much more resilient compared to the Singaporean economy. Figure 2.8 shows the selected years of annual inflow of FDI into China from 1979 to 2007. The line shows the percentage of FDI into China from Singapore.


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Percentages

Figure 2.7 Economic Growth of China and Singapore, 1981-2007 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

China

Singapore

Source: China Statistical Yearbook; Department of Statistics, Singapore.

8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

Percentage

90 80 70 60 50 40 30 20 10 0

19 79 -1 98 4 19 85 19 89 19 90 19 95 19 96 19 97 19 98 19 99 20 00 20 03 20 04 20 05 20 06 20 07

US$ Bil

Figure 2.8 FDI into China (US$ billion)

Global FDI into CHINA

Singapore's FDI into China

Percentage

Source: China Statistical Yearbook, various issues.


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ASEAN Charter The ASEAN Charter, the vital document that makes ASEAN an entity with a legal personality, was first endorsed in late 2007 by all ten ASEAN leaders. Once ratified, ASEAN can then in theory, enjoy the reputation and standing, similar to that of the European Union (EU) at the international stage. The Charter will help shape ASEAN’s key processes and institutions, which will ultimately be useful in trade and economic expansion. This is not without controversy. Is the ASEAN Charter the right step forward for the grouping of these diverse neighbours toward becoming a community? Proponents urge that all embrace the document, while opponents argue that it is not worth the effort. Differences can be found in numerous public debates, including in Singapore. One school of thought believes that ASEAN did less than it could have otherwise and has even gone backwards in some areas. Another school of thought defends the ASEAN Charter as a good and workable compromise. Debates between Charter proponents and opponents will likely grow. For example, Indonesia, Thailand and the Philippines have yet to ratify the Charter. The fact that these three countries are now liberal democracies means that open debates will be held in public and parliamentary discussions before their leaders can ratify the Charter. In other words there are no substitutes for action. The debate might consider not just the words on paper. Unfolding events have hinted at how the Charter might function. First, does the Charter do enough to deal with Myanmar or other states that might violate the norms of the group? Myanmar had announced its ratification of the Charter. This may hearten Charter proponents as one more step forward. But the Myanmarese government also announced that Miss Aung San Suu Kyi will still be kept under house arrest until the end of 2009. A time frame is good, but given that as ASEAN moves toward greater democracy, a free and fair electoral system and freedom for Miss Suu Kyi is needed. The Myanmar government’s ratification seems more a gesture than a genuine agreement to ASEAN’s values and norms in the Charter, which include democracy, human rights and good governance. Instead, the generals claim to uphold the norm of non-intervention, another principle enshrined in the Charter. So in a way, the ASEAN Charter is not consistent itself. So too went the debate about the ASEAN human rights body, a promise from Article 14 of the Charter. Optimists urged it forward, and the High Level Panel on its terms of reference met for the first time in Singapore. Yet that first meeting revealed differences and a lack of ambition. While some called for monitoring, no one even set out the long-term goal of a more independent commission like those in the United Nations.


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To the contrary, some countries including Myanmar, had invoked the principle of non-interference to argue even against reporting on human rights records. If this continues, the body and the Charter will be emaciated. Some Argue that Myanmar’s membership ought to be suspended, while others argue that if Myanmar were not a member, further inroads could be put out of reach. The truth is that the international community does not want to deal with any country that willfully disregards norms. Note the six-party talks about North Korea at the sidelines in Singapore. Even with the United States, China, Japan and Russia on board, progress on the issue has been slow. Can we reasonably expect ASEAN to do more with Myanmar than the UN or six parties have done with these other states, even if the Charter were to be more strongly worded? Words alone, whether in the infant ASEAN Charter or the long established UN Charter, are no substitute for political will and firm action. Second, can the Charter ensure peace between neighbours? The Charter sets out principles for the peaceful settlement of disputes. Even Charter skeptics admit the risk of inter-state war in Southeast Asia has declined today, partly due to ASEAN. Still in the recent Preah Vihar temple dispute between Cambodia and Thailand where each side has military forces facing off the other, Cambodia has sought intercession by the UN and by ASEAN, suggesting that ASEAN can still facilitate bilateral and multilateral consultations and negotiations. The Preah Vihar incident suggests the present, relatively happy situation of peace cannot be taken for granted. If need be, the Charter can serve as a basis for mediation for the two sides to this or other crises, and engrave the habits of peace more deeply. It would also serve, if conflict eventuates, as a basis for rightly criticizing both sides. Can the Charter make ASEAN more efficient and effective? Three very different events may help shed some light. First, at the ASEAN Regional Forum, the traditional night of fun and frivolous acts by visiting foreign ministers was jettisoned. Second, the ASEAN Secretary-General Surin Pitsuwan also reported back on the efforts made in the aftermath of Cyclone Nargis. Third, the ASEAN chairmanship has moved to Thailand, where the Samak government is facing domestic political pressures and had had its foreign ministers resigned one after another under pressure. These three events point to the fact that ASEAN needs to be both more trim and also more institutionalized. Charter proponents are right to note


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the Charter takes a good step forward by creating a coordinating council to try to ensure that the many meetings that ASEAN holds are relevant and effective. It is also a step forward to empower the ASEAN Secretary-General to monitor and report non-compliance to the summit. An ASEAN Secretariat that has more responsibility can also hedge against depending too much on the ASEAN chair, especially when domestic politics heat up and cause distractions. Some Charter opponents wish to make ASEAN more “people-centred” by involving Parliaments. This is laudable but may inadvertently make ASEAN even more unwieldy. Democracy is, after all, still unsettled within most ASEAN member countries and to democratize at the regional level at the present time may make things worse. Yet for the first time, the Charter would allow the Summit to take emergency measures and to deal with serious breaches by any member state. Even if there is no consensus, the Summit can decide under Article 20 on how to deal with a specific situation. To me, this implicitly opens the door to non-consensus decisions, if the leaders see fit. Additionally, there are many other improvements, some surveyed above, that can be taken, and on which the Charter can help. The Charter needs to be ratified. To do anything less, after having signed off on it after a year of negotiations at their 40th anniversary summit, is to invite international ridicule of ASEAN. Even when ratification is complete, it is far from sufficient. The Charter is not an end in itself, but just a useful beginning. There is a five-year review period built into the Charter and this should be used. Political-will needs to be built to go further and faster in the future. All the above discussed, though mostly political in nature, could be transplanted into the economic realm as well and facilitate better trading and investments amongst ASEAN, and with China and the rest of the world. Conclusion Having discussed all the above, and with the WTO global trade talks failing, regional economic integration seems like the next sensible thing for countries to achieve; it will be the next second best choice countries will make. Whether it is AFTA, the ACFTA or the potential future East Asian FTA, apart from providing greater regional trade, investments and other positive


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spill-over effects of trade liberalization, successful FTAs or RTAs are vital for maintaining regional peace and security, which are essential for long-term economic progress. To put across former WTO director-general Supachai Panitchpakdi’s words again, RTAs, if done in a calibrated way, could act as building blocks for the multilateral WTO free trade framework. This idea and intention ought to be communicated time and again to the global community at large, to reassure the international community that Asia including ASEAN, is not going towards regional protectionism; with a more cohesive and cooperative Asia and ASEAN, negotiations and subsequent cooperation with other regional and global trading blocs may be more effective. The ASEAN Charter and AEC – ASEAN’s Answer for the Time Being? ASEAN Vision 2020 would be the ultimate end-goal the AEC aims to achieve in which there would be free flow of skilled labour, trade, investments, capital, equitable development, reduction in poverty and socio-economic disparities within ASEAN. The big question now is: is it achievable? In recent times, several of our fellow ASEAN comrades have been experiencing domestic and international challenges. From the disaster of cyclone Nargis in Myanmar, to the constitutional crisis in Thailand; from the border disagreement between Cambodia and Thailand on the Preah Vihar temple, to the social and politically related public unrest and demonstrations, and street protests all across ASEAN’s major capital cities due to rising food and petrol prices. The challenges are humongous. Target 2015 or Vision 2020, the exact date for the actual formation of the AEC is not really that important. What is more vital is that all ASEAN members can understand the importance, relevance and urgency of the existence of the AEC. The ASEAN Charter can help members move forward in the right direction. The ASEAN Charter and the AEC may not provide the ultimate solutions to all of ASEAN’s problems, particularly economic and political related ones. However, it is in the right direction and ought to be pursued nonetheless by each and every of the ten members. If we were to use the analogy that the signing of the ASEAN Charter and the AEC are parties, then those who are ready early can come to the party early or on time, and help prepare the food and beverages. Those who are a little busy can arrive slightly later. The entrance to the party will always be open and all are welcomed. This is the reality of the situation.


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Appendices Singapore’s FTAs12 As an integral part of Singapore’s trade architecture, a network of 15 FTAs has been or will be signed. The FTAs have been designed to position Singapore as an integrated niche manufacturing centre in the region, promote research & development in our knowledge-based economy and drive the services hub. 1) AFTA The ASEAN Free Trade Area (AFTA) was initiated in 1992. The Common Effective Preferential Tariff (CEPT) Scheme, which came into effect in 1993, is the main mechanism through which tariffs are reduced in ASEAN. In the Agreement, ASEAN agreed to reduce tariffs to 0-5 per cent over 15 years. Today ASEAN is committed to eliminate all tariffs in the Inclusion List (IL) for ASEAN–6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) by 2010 and CLMV by 2015. Currently for ASEAN-6, 99.7 per cent of tariff lines in the IL stand at 0-5 per cent tariffs, while 65 per cent of items on the IL stand at zero tariffs. For CLMV, 90.6 per cent of products traded in the region have been moved into the AFTA scheme of which 76.86 per cent of these items have been brought down within the 0-5 per cent tariff band. 2) ASEAN-China FTA (ACFTA) In November 2001, ASEAN and China agreed to launch negotiations for an ASEAN-China Free Trade Area (ACFTA). In the following year, ASEAN and China signed the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China (FA). The FA, which contains both liberalization and cooperation elements, serves as a roadmap for the realization of an ACFTA by 2010 for the ASEAN-6 and China, and by 2015 for the rest of the ASEAN members. 3) ASEAN-Korea FTA (AKFTA) In October 2003, at the ASEAN-ROK Summit held in Bali, Indonesia, Korean President Roh Moo Hyun proposed that ASEAN and Korea should deepen relations by developing a comprehensive partnership, with the possibility of establishing a Free Trade Area. As a commitment to the realization of the


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AKFTA, at the November 2004 Summit, Leaders agreed that ASEAN-6 and Korea shall eliminate tariffs for 80 per cent of all products by 2010. Negotiations for the AKFTA commenced in 2005. The Trade in Goods chapter of the AKFTA entered into force in June 2007, while negotiations for the Trade in Services chapter are still ongoing. 4) SAFTA Negotiations for the Singapore-Australia Free Trade Agreement (SAFTA) were launched on 15 November 2000 by the Prime Ministers of both sides at the fringe of the APEC Leaders’ Summit after 10 formal rounds of negotiations, Singapore and Australia successfully finalized an FTA in November 2002. The Agreement was signed on 17th February 2003 and came into force on 28th July 2003. SAFTA is a comprehensive agreement covering areas such as trade in goods, trade in services, investment, telecommunication, financial services, movement of business persons, government procurement, intellectual property rights, competition policy, e-commerce and education cooperation. 5) Hashemite Kingdom of Jordan (SJFTA) Launched in October 2003, negotiations for the Singapore-Jordan Free Trade Agreement (SJFTA) and the Singapore-Jordan Bilateral Investment Treaty (BIT) were concluded on 29th April 2004 and came into force on 22nd August 2005. The SJFTA is Singapore’s first FTA with a country in the Middle East and Jordan’s first FTA with a country in Asia. It aims to provide an institutional platform for increasing economic engagement between Singapore and Jordan. The SJFTA and the BIT form part of a broader Framework on Closer Economic Partnership between Singapore and Jordan, which also includes a Technical Support Agreement signed in October 2003 and Memorandum of Understanding in Cultural and Tourism Cooperation signed during the Official Visit of Prime Minister Goh Chok Tong to Jordan in February 2004. These agreements will serve to deepen and broaden our links with Jordan and the Middle East region. 6) India (CECA) Negotiations for the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) were launched on 27th May 2003 in New Delhi. Prior


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to this, an India-Singapore Joint Study Group conducted a study on the feasibility of the CECA. Its report highlighted positive recommendations and served as a framework for subsequent negotiations. After 13 rounds of negotiations, the India-Singapore CECA was successfully concluded and was signed on 29th June 2005, during Prime Minister Lee Hsien Loong’s State Visit to India. This landmark agreement is India’s first ever CECA and Singapore’s first comprehensive bilateral economic agreement with a South Asia economy. It also marks the first time that Singapore has included taxation agreement discussions in the process. The Agreement encompasses trade in goods, trade in services, investment protection and other features. Mutual Recognition Agreements will eliminate duplicative testing and certification of products in specific sectors, and cooperation chapters will encourage and facilitate bilateral cooperation in several sectors. 7) Japan (JSEPA) Negotiations for the Agreement between Japan and Singapore for a New-Age Economic Partnership (JSEPA) were launched on 22nd October 2000. This followed the positive recommendation by the Japan-Singapore Joint Study Group, whose report served as the basis for the JSEPA negotiations. The Japan-Singapore Economic Agreement for a New Age Partnership was signed in Singapore after 12 rounds of negotiations and came into force on 30th November 2002. A Review of the JSEPA was held in 2006, resulting in a revised JSEPA that will bring about a greater liberalization in trade in goods and services. 8) KSFTA Negotiations for the Korea-Singapore Free Trade Agreement (KSFTA) were launched on 23rd October 2003 following the positive recommendations by the Joint Study Group. After seven rounds of negotiations, the Agreement was signed on 4th August 2005. The KSFTA is a comprehensive agreement covering trade in goods, trade in services, investment, customs procedures, mutual recognition agreements, intellectual property rights, competition policy, government procurement and cooperation in a wide range of areas. The KSFTA came into force on 2nd March 2006 and is Korea’s first free trade agreement with an Asian country.


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9) ANZSCEP The Agreement between New Zealand and Singapore on a Closer Economic Partnership (ANZSCEP) is Singapore’s first bilateral FTA. The FTA negotiations between New Zealand and Singapore were completed on 18th August 2000. New Zealand Prime Minister Helen Clark and Singapore’s Prime Minister Goh Chok Tong signed the ANZSCEP in a signing ceremony held on 14th November 2000 in Singapore. 10) PSFTA The Panama-Singapore Free Trade Agreement (PSFTA) entered into force on 24th July 2006. The agreement was signed on 1st March 2006 after three rounds of negotiations. The Panama-Singapore FTA is our first bilateral FTA with a Latin American country. Apart from enhancing economic links between Panama and Singapore, the Panama-Singapore FTA will also help to deepen Singapore’s engagement with the Latin American region as a whole. The Panama-Singapore FTA is our first bilateral FTA with a Latin American country. In 2005, Singapore signed a plurilateral FTA – the Trans-Pacific Strategic Economic Partnership Agreement – with Brunei, Chile and New Zealand. 11) Switzerland, Liechtenstein, Norway and Iceland (ESFTA) The EFTA*-Singapore FTA (ESFTA) initiative was first mentioned at the EFTA Ministerial Meeting on 12th December 2000. After one round of exploratory talks in Geneva, both sides announced the launch of negotiations on 4th May 2001. The Agreement was signed on 26th June 2002, in Egilsstadir, Iceland, after three rounds of negotiations which took place from July-November 2001. The Agreement came into force on 1st January 2003 and is currently Singapore’s only FTA with Europe. * EFTA is a free trade area comprising of Switzerland, Iceland, Liechtenstein and Norway.

12) Trans-Pacific SEP (Brunei, New Zealand, Chile, Singapore) On 3rd June 2005, on the sidelines of the APEC Ministers Responsible for Trade (MRT) meeting in Jeju, Korea, the ministers of Brunei, Chile, New Zealand and Singapore announced the conclusion of the Trans-Pacific Strategic Economic Partnership Agreement (“Trans-Pacific SEP”). The Agreement was first launched in October 2002 at the APEC Leaders’ Economic Meeting in Los Cabos, Mexico. Prior to Brunei’s participation as a


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party to the Agreement, the Trans-Pacific SEP was known as the Pacific-Three FTA. The inclusion of like-minded parties such as Brunei to the Agreement demonstrates the potential of the Trans-Pacific SEP to grow into a larger strategic agreement for trade liberalization. Chile, New Zealand and Singapore signed the Agreement on 18th July 2005, while Brunei signed on 2nd August 2005. The Agreement entered into force on 28th May 2006 between New Zealand and Singapore, on 12th July 2006 for Brunei and on 8th November 2006 for Chile. 13) USSFTA The US-Singapore Free Trade Agreement (USSFTA) was signed by Prime Minister Goh Chok Tong and President George W. Bush on 6th May 2003 in Washington DC. The USSFTA entered into force on 1st January 2004 after it was approved by the House of Representatives on 25th July 2003 and by the Senate on 1st August 2003. The USSFTA has been hailed as a “landmark agreement” for its WTO-plus and NAFTA-plus commitments. These include the protection of intellectual property, the inclusion of e-commerce and ICT services, advanced rules of origin and customs cooperation. As the first FTA to be concluded between the US and an Asian country, the USSFTA will cement the already strong economic ties between Singapore and the US. It will also serve as a catalyst towards deeper US economic engagement in the region and spur other ASEAN-wide FTAs. 14) Singapore and Peru Sign FTA, 29th May 2008 15) CSFTA China and Singapore signed the China-Singapore FTA in October 2008. First of the kind in the world for China. Others ASEAN concluded FTA negotiations with India, Australia and New Zealand in August 2008. FTA to be signed in December 2008. ASEAN and Japan complete signing of Comprehensive Economic Partnership Agreement (AJCEP), 14th April 2008. Substantive Conclusion of Negotiation for the Gulf Cooperation CouncilSingapore Free Trade Agreement, 31st January 2008.


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1980 1988 2000 2004 2006

1980 1988 2000 2004 2006

1980 1988 2000 2004 2006

1980 1988 2000 2004 2006

Japan

China

Korea

Taiwan

Origin of Regional Year Exports Japan

– 60667 148321 182370 243801

17505 60696 172268 253845 325465

18099 47540 249203 593439 969380

3.9 3.6 6.3 13.1 14.3

China

– – 11.2 7.6 7.3

17.4 19.8 11.9 8.5 7.4

– – 4.5 4.7 4.6

4.1 5.8 6.4 7.8 7.7

Korea

– 3.7 16.9 19.9 23.2

– – 2.6 3.1 3.2

– 1.6 4.7 3.9 3.6

– – 2.0 2.3 2.1

– 5.4 7.5 7.4 6.8

– – 21.1 18.0 16.6

– 5.9 6.2 7.1 5.3

24.1 38.4 17.9 17.0 16.0

3.7 4.4 5.7 6.3 5.6

– – 3.7 3.7 4.2

1.5 2.2 3.3 2.2 2.7

2.3 3.1 2.3 2.1 2.4

3.0 3.1 4.3 3.2 3.0

– – 7.4 7.4 7.3

4.6 2.8 7.2 5.8 5.1

4.3 2.8 3.7 4.1 4.0

7.0 4.9 9.5 9.1 8.1

– – 62.9 59.7 61.8

23.5 32.3 44.0 47.1 43.5

53.0 61.2 47.1 42.6 38.6

21.7 27.2 39.7 46..9 45.5

Taiwan Hong Kong Singapore ASEAN-4* EA SUM

Share of Regional Exports Designated for (%)

– – 10.7 19.6 19.4

22.3 16.9 16.7 12.4 9.5

130441 264856 479249 565675 649931

Total Exports (US$ million)

Appendix Table 2.1 Origins and Destinations of East Asian Intra-Trade 56 ♦ Teng Siow Song

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1980 1988 2000 2004 2006

1980 1988 2000 2004 2006

Singapore

ASEAN-4

47100 80080 269099 334108 442265

19375 39306 137804 179615 271799

19730 63163 201860 259314 316816

Total Exports (US$ million)

34.5 19.5 16.0 15.0 13.7

8.1 8.6 7.5 6.4 5.5

6.1 5.2 5.5 5.3 4.9

Japan

1.1 2.2 3.4 6.8 8.3

1.6 3.0 3.9 8.6 9.8

34.9 34.4 34.6 44.0 47.0

China

1.7 2.8 3.7 2.9 3.9

1.5 2.0 3.6 4.1 3.2

1.5 1.0 1.9 2.2 2.1

Korea

– 2.0 4.2 3.5 3.3

– 2.8 6.0 4.6 3.5

2.6 2.3 2.3 2.2 2.0

1.9 2.9 4.2 5.1 4.7

20.8 20.3 24.9 21.7 28.3

0.5 0.3 0.5 3.3 3.2

11.8 9.0 12.6 10.4 11.3

7.7 6.2 7.9 9.8 10.1

2.5 2.5 2.5 2.4 2.6

51.0 38.4 44.1 43.7 45.2

39.7 42.9 53.8 55.2 60.4

48.1 45.7 47.3 59.4 61.8

Taiwan Hong Kong Singapore ASEAN-4* EA SUM

Share of Regional Exports Designated for (%)

Note: * ASEAN-4 denotes Indonesia, Malaysia, the Philippines and Thailand. Source: Direction of Trade Statistics Yearbook 2007, IMF. Taiwan’s data are obtained from Bureau of Foreign Trade’s website.

1980 1988 2000 2004 2006

Hong Kong

Origin of Regional Year Exports

Appendix Table 2.1 (continued)


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China

South Korea

Private study on a trilateral FTA/EPA Study between China and South Korea Negotiation between Japan and South Korea Signed Effect Signed Effect Signed Signed Agreed Effect Study Agreed Agreed Effect of Negotiation Early Harvest Signed

Japan Signed Effect Signed

ASEAN

Thailand

Indonesia

Effect Agreed Effect of Early Harvest Study

Malaysia

ASEAN Free Trade Agreement. ASEAN+3 FTA research on going. ASEAN+6 FTA research beginning.

Effect Agreed Signed Signed

Singapore Signed

Philippines

Source: JETRO homepage (http://www.jetro.go.jp/indexj.html) accessed on 8th November 2008; various compilations by author.

Australia Negotiation Negotiation Effect Effect Negotiation New Zealand Negotiation Study Agreed Effect Effect Negotiation India Negotiation Consideration Study Agreed Effect Negotiation Negotiation US Consideration Consideration Effect Negotiation Consideration Consideration Consideration Canada Negotiation Negotiation Negotiation EU Study EFTA Negotiation Effect Negotiation Mexico Effect Study Negotiation GCC Negotiation Chile Agreed Signed Effect

Japan China South Korea ASEAN Singapore Thailand Malaysia Indonesia Brunei Vietnam Philippines

Appendix Table 2.2 Main Bilateral FTA/EPA of the East Asian Nations (as of October 2008) 58 ♦ Teng Siow Song

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Notes * Teng Siow Song is Research Associate of the East Asian Institute, National University of Singapore. He has a Masters in Economics degree from the University of Sydney, Australia, and is currently a part-time PhD candidate at the University of South Australia. His research interests lie in ASEAN-China, China-Singapore, Singapore-Vietnam economic and trade-related issues. The views expressed herein are his own and do not represent those of his institute or university. 1. For more information, see “Declaration of ASEAN Concord II (Bali Concord II)”, ASEAN Secretariat. 2. East Asia hereon includes all ten ASEAN countries of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam; Hong Kong SAR; Chinese Taipei; China; Japan; Korea. 3. “ASEAN+3 or ASEAN+6: Which Way Forward?”, ADB Institute Discussion Paper No. 77, September 2007. 4. China-ASEAN Free Trade Area: 2008 Quarterly Report. 5. See “Joint Media Statement of the Thirty-Eight ASEAN Economic Ministers’ (AEM) Meeting Kuala Lumpur”, 22nd August 2006, ASEAN Secretariat. 6. For more discussions on these, see Kawai and Wignaraja (2007). 7. See Venu (2005). 8. “Trade Talks’ Failure Weighs on Other Issues”, Wall Street Journal, available at accessed on 31st July 2008. 9. Kondo (2006). 10. Economist Intelligence Unit, 2008. 11. “Singapore-Malaysia Trade Jumps 11% In H1 2008”, EnterpriseOne, 13th August 2008, available at , accessed on 18th August 2008. 12. Source: International Enterprise Singapore.

References “ASEAN+3 or ASEAN+6: Which Way Forward?”, ADB Institute Discussion Paper No. 77, September 2007. Asian Economic Cooperation and Integration: Progress, Prospects & Challenges, ADB publication stock no. 091804, 2005. China-ASEAN Free Trade Area: 2008 Quarterly Report. “Declaration of ASEAN Concord II (Bali Concord II)”, ASEAN Secretariat, available at “Joint Media Statement of the Thirty-Eight ASEAN Economic Ministers’ (AEM) Meeting Kuala Lumpur”, 22nd August 2006, ASEAN Secretariat, available at


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Kawai, M. and G. Wignaraja (2007), “ASEAN+3 or ASEAN+6: Which Way Forward?”, ADB Institute Discussion Paper No. 77. Kondo, M. (2006), “Japan and an Asian Economic Community”, RIS Discussion Paper No. 106. Venu, M. K. (2005), “An Asian Economic Community?”, The Economic Times of India, 20th September 2005.


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Long-Run Currency Exposure of China-Malaysia Trade ♦ 61

Chapter 3 Long-Run Currency Exposure of China-Malaysia Trade Chee-Wooi Hooy* and Tze-Haw Chan

Introduction Since the 1980s, China’s economic reforms have been instrumental in promoting its trade sector. The continuous high growth of China has had a significant impact on the world economy, particularly in the East Asian region. A substantial amount of China’s growth over the past decade has stemmed from the continued surge in her trade surplus due to undervaluation of renminbi over the years. In a broader perspective, China has hampered the prospect of her Asian neighbours from letting their currencies to rise very much against the USD to avoid losing competitive position against China. Malaysia, as one of the major trading partners of both China and the US, is unexceptionally facing the challenge. Along the lines of trade liberalization among the East Asian economies, Malaysia has actively participated in both global and regional trading activities. The liberalization process since 1970s brings to a slash in import tariff and non-tariff barriers and promoted a surge in her trade with industrial countries. The reduction in capital restriction and investment friendly policy has also attracted inflow of FDI from the industrial countries and spurred the growth and diversity of Malaysian economy especially during 1986-1996. However, the rising of China in the 1990s was commonly claimed to have divested away her trade and capital resources because both Malaysia and China shared quite a comparable factor endowment ratios, range of export products (mainly in manufacturing product), as well as similar direction of trade to the US and Japan. The recent devaluation and USD de-pegging of both China renminbi and Malaysian ringgit on July 2005 have open a new scenario to the trade sector in both countries. Since the opening of mainland Chinese economy in 1978, renminbi was pegged to the USD, and a dual-track currency system was instituted, where renminbi is only usable locally while foreign exchange 61


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62 ♦ Chee-Wooi Hooy and Tze-Haw Chan

certificates are forced on foreigners. China abolished the dual-track system and introduced single free floating currency effective January 1, 1994 and the renminbi turn freely convertible under current account transaction effective December 1996. In the decade until 2005, renminbi was tightly pegged at 8.2765 yuan to the USD. On July 21, 2005 People’s Bank of China announced the 2.1 per cent revaluation to 8.11 yuan per USD and move from USD pegging to managed floating based on a basket of foreign currencies. To date, the yuan is traded at around 6.95 yuan (June 2008), appreciated about 16 per cent since 2005. The Malaysian ringgit was trading as a free float currency at around RM2.50 per USD since early 1970s. During the 1997 Asian financial crisis, after the sharp depreciation of ringgit to around RM4.00 within a year, Bank Negara Malaysia (BNM) decided to peg ringgit to the USD in September 1998 at RM3.80. On July 21, 2005, BNM responded to China’s de-pegging announcement within an hour by announcing the end of the 7-year pegging. Similar to China, BNM allows the ringgit to operate in a managed floating system based on a basket of several major currencies. The ringgit has appreciated 1.3 per cent to RM3.75 in a short period of time and now has reach RM3.2 (June 2008), about 15.6 per cent appreciated from the pegged level at 2005, a value quite near to renminbi appreciation. The close ties of ringgit to renminbi implied the Malaysian government regards very seriously on the real exchange rate value of the Malaysian ringgit against any appreciation of renminbi as it could threaten the balance of payment of Malaysia, which has improved since the 1997/98 crisis. Despite Singapore and Japan, China emerged as the major trading partner for Malaysia in the past ten years. While the bilateral trading between Malaysia-Hong Kong has always been surplus and recorded RM13 million by 2007, the Malaysia-China (mainland)’s deficits has widened from RM7 million (2004) to about RM12 million in 2007. Some worries arise that the widening deficits may attribute to the incompetent of Malaysian ringgit against the Chinese yuan. Nevertheless, the exchange rates mechanism is getting complicated especially when both nations have committed to the export-led growth policy based on the maintenance of their undervalued currencies against the USD. Controversies were abounded and theoretical as well as applied questions have been raised among academia and policy makers. The issue continues to be relevant to the understanding of the exchange rate dynamics and the formulation of trade policies among the two nations that have recently succumbed to the revaluation pressure by releasing their pegging against USD. The impact of exchange rate devaluation on international trade has long been a major concern in international economics. The elasticity approach to


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balance of payment was made well known as Marshall-Lerner condition (MLC henceforth)1 that becomes the underlying assumptions of currency devaluation policy. The foreign exchange instability during the post-Bretton Wood era offers an excellent opportunity to investigate how exchange rate changes affect trade flows, and whether the currency devaluation is expansionary or contractionary. Most early studies focused on the US and developed nations (see Krugman and Baldwin, 1987; Rose and Yellen, 1989; Noland, 1989; Rose, 1991; among others) but the findings are at best mixed when aggregate trade data were used. Some of them tried to avoid the ‘aggregation bias problem’ by employing data between one country and each of her trading partners at the bilateral level, and found some supports for favourable impact of currency depreciation on trade balances. On the other hand, literature on developing Asian nations show better supports for the MLC as long run features and J-curve2 as short run phenomenon (see inter alia, Himarios, 1989; Hsing and Savvides, 1996; Bahmani-Oskooee and Janardhanan, 1994). Interesting findings are reported by recent Asian studies that consider the crisis experience. For instance, Bahmani-Oskooee and Miteza (2003) find that devaluations have been contractionary for Indonesia and Malaysia, but expansionary for the Philippines and Thailand. Onafowora (2003) employs a cointegration approach to find that bilateral trade, real exchange rates, domestic and foreign incomes are bounded by long run relationship and confirms the short run J-curve effect. Bahmani-Oskooee and Wang (2006) employ disaggregate quarterly data to discover that the Chinese income instead of Chinese yuan has played the major role in the Chinese trade balance determination. Chinese yuan depreciation only shows favourable impact on trade balance in 4 out of 13 major trading partners, including the US. The Jcurve, however, is rarely supported. Apparently, at present stage, neither the theoretical nor the empirical works have established definitively whether currency devaluation (nominal or real) has caused trade expansion or trade deterioration, or even if exchange rates play a role in determining trade flows. The issue has become more vital following the recent development of regional episodes. With the China’s recent accession to WTO (November 2001) and the emergence of ASEAN10+3 Free Trade Area due to the Chiang Mai Initiative (May 2000)3 and the Bali Dialogue (October 2003)4, the need for an amendment of regional trade policy and currency arrangements anchoring by China is well understood, but less being investigated. This study investigates the dynamic nexus of bilateral trade balanceexchange rates, with respect to Malaysia and China. Both economies are of different regulatory regimes, different degrees of development and trade


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openness, but within a comparable exchange rate regime. Our analyses take concerns of the possible transmission channels via macro-variables (e.g. domestic output, foreign income) as in standard international trade model. The J-curve effect is investigated as well, within the unrestricted Vector Autoregressive (VAR) framework. The present study is organized in the following manner. In the next section, a theoretical trade model is presented which forms the basis of our empirical model for testing the exchange rate impact. This is followed by our empirical estimation procedures, data description and estimation results presented and discussed in two subsequent sections. Finally, conclusions are drawn in the closing section. China-Malaysia Trade Balance Model We posit that the demand for China’s import depends upon the relative price of income of Malaysia and China, expressed as follows: IM CH ( MY ) = IM CH ( MY ) (YCH , RPCH − MY , )

(1)

where IMCH(MY) represent China’s demand for imports from Malaysia, YCH refers to China’s real income, and RPCH–MY is the relative price of goods between China and Malaysia. Letting E = the nominal exchange rate, defined as the domestic price of foreign currency, the relative price of imported goods can be expressed as: P RPCH − MY = FX CH  MY MY  PCH where

  = RFX CH  MY

(2)

PCH is the ratio of China and Malaysia price indexes of all goods, PMY

RFX CH

is the nominal exchange rates of Chinese yuan over Malaysian

MY

ringgit and RFX CH corresponding real exchange rates, defined as the relative MY

price of domestic to foreign goods. With real exchange rates thus defined, a decrease in its value indicates a real devaluation of the domestic currency. Substituting (2) into (1), we obtain:


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  IM CH ( MY ) = IM CH ( MY )  YCH , RFX CH   MY 

(3)

On the contrary, China’s export to Malaysia depends upon Malaysian income, as well as the relative price of goods between China and Malaysia: EX CH ( MY ) = EX CH ( MY ) (YMY , RPCH − MY )

(4)

Again, based on (2) we can rewrite the function as:  EX CH ( MY ) = EX CH ( MY )  YMY , RFX CH  MY

  

(5)

We thus derive China’s trade balance with Malaysia, TB CH–MY , as the following function: TBCH ( MY ) =

EX CH ( MY )  =  YCH , YMY , RFX CH IM CH ( MY )  MY

  

(6)

The above model expresses the balance of trade as a function of the real exchange rate and the levels of both China’s and Malaysia’s incomes. Taking natural logarithm of both sides, exempted the country notations, and adding a stochastic term to capture short-term departures from long run equilibrium, the empirical model for China-Malaysia trade is obtained: ln(TBt ) = β 0 + β1 ln(YCH ,t ) + β 2 ln(YMY ,t ) + β3 RFX t + ε t

(7)

where ln represents natural logarithm, ln(TBt) is calculated from ln(EX) – ln(IM), εt represents a white noise process, β 0 is the intercept and β1 , β 2 , β3 are the parameters to be estimated. Note that expressing the trade balance as the ratio of exports to imports allows all variables to be expressed in log form and obviates the need for an appropriate price index to performing our basic statistical tests. Given the definition of the real exchange rates, the sign of β3 is negative if the Marshall Lerner condition holds, that is, if a real devaluation of the domestic currency improves the trade balance. The Empirical Testing Procedure The relationship between trade balance with income and exchange rates is considered using time series regression analytical framework. Our approach


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is a 2-step procedure. The first is to identify and filter any trend and structural breaks in all the series involved in order to avoid possible spurious regression problem. The trend problem is particularly concern for the industrial production series. The structural breaks occurred due to the recent Asian currency crisis, as well as the fixed exchange rate regime adopted by the Malaysian government during the period Sept 1, 1998 to July 21, 2005. The filtering process is done through running a simple regression on all the involved variables, as shown followings: Z t = a0 + b1Trendt + b2 D1997,t + b3 DRMFX ,t + et

(8)

where Zt includes TBt, the trade balance ratio, RFXt, the real exchange rates, and YCH,t and YMY,t, incomes of China and Malaysia, respectively. The binary variable D1997,t takes unity value of one for the period July 1997 to August 1998 and zero otherwise. For DRMFX,t, the binary variables takes value of one for the period Malaysia ringgit was fixed to RM3.80/USD, i.e. from September 1998 to July 2005, and zero otherwise. If these series are indeed contaminated with the trends and structural breaks, the residuals of the regression will be collected to replace the original series and regressed in model (7) as follows: * * * ln(TBt* ) = β 0 + β1 ln(YCH ,t ) + β 2 ln(YMY ,t ) + β 3 RFX t + ε t

(9)

The asterisk marks define the de-trended series that is also free from structural breaks. In addition, we also conducted a stationarity test developed by Kwiatkowski-Phillips-Schmidt-Shin (1992) to verify the unit root problem. Since all the right hand side variables are demeaned, we can expect β 0 not significantly different from zero. For diagnostic checking purposes, to ensure that the specification of the mean equation of model (9) is free from autocorrelation problem we refer to Durbin-Watson test on AR(1), F-test on the joint significance of all of the slope coefficients in the regression, and the Ljung-Box Q-statistics on the residual for higher AR terms. As we are using high frequency monthly observations for all series, our least square regression might have exposure to autoregressive conditional heteroskedasticity (ARCH) effects. We test the effects by a Lagrange multiplier (LM) test proposed by Engle (1982). The ARCH effect is also examined through the Ljung-Box Q-statistics on the squared residuals. Finally Jarque-Bera normality test is also examined to affirm that our regression is consistent with the standard regression assumptions.


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To trace the possibility of J curve, we run a vector autoregressive model (VAR) to examine the sequential impact of exchange rates on trade balance, assuming the effects of the income variable, i.e. YCH and YMY, to be exogenous. The VAR specification is given by the system of regressions as following: 12

12

TBt = ∑ δ1TBt −i + δ 2YCH ,t −i + δ 3YMY ,t −i + ∑ δ 4,i RFX t −i + v1t (10a) i =1 j =1 12

12

i =1

j =1

RFX t = ∑ δ1TBt −i + δ 2YCH ,t −i + δ 3YMY ,t −i + ∑ δ 4,i RFX t −i + v2t

(10b)

The responses of the trade balance from the real exchange rate shocks are examined using the generalized impulses procedure as described by Pesaran and Shin (1998), which does not depend on the ordering of the variables at the right hand side of the VAR equations. The generalized impulse responses from the real exchange rate shocks to the trade balance, as stated in (10a), is basically the orthogonal set of innovations derived by applying a variable specific Cholesky factor of the residual covariance matrix computed with the trade balance at the top of the Cholesky ordering. Our analyses are all based on high frequency monthly data. The sample period spanned from January 1990 to January 2008. Real exchange rates are compiled by having the nominal exchange rates (local currency/USD) adjusted for relative price changes which is proxy by consumer price index (CPI) series; whereas trade balance ratios are computed based on the USD denominated export and import series. The income for China and Malaysia are represented by their industrial production (IP) indices as GDP is not available for high frequency monthly observation. All trade series are sourced from the Direction of Trade Statistics compiled by International Monetary Fund while the CPI, IP and exchange rates are sourced from DataStream. Empirical Results and Discussion Descriptive statistics for all the series are reported in panel A of Table 3.1. All the time series basically are not univariate normal. To avoid spurious regression problem, the stationarity of all the series are examined using the Augmented Dickey Fuller (ADF) unit root test for both intercept and intercept plus trend models. The ADF results suggest that only the real exchange rate series of yuan/ringgit is not stationary. In panel B of Table 3.1, the correlation


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Table 3.1 China-Malaysia Trade Balance Model: Descriptive Statistics and Correlation Panel A: Summary of Descriptive Statistics Statistics

ln(EX/IM)

Mean Maximum Minimum Std. Dev. Skewness Kurtosis Normality Unit Root 1 Unit Root 2

-0.5568 0.1492 -1.2280 0.2650 0.3805 3.0065 5.2369* (0.0729) -4.3057*** -4.3921***

ln(IPChina)

ln(IPMalaysia)

4.7307 4.8629 4.3682 0.0512 -1.5857 13.7192 1129.8340*** (0.0000) -3.9077*** -3.8125**

4.3959 4.9712 3.5752 0.3820 -0.3532 2.0002 13.5503*** (0.0011) -4.3057*** -4.3921***

ln(IPChina)

ln(IPMalaysia)

RFX 0.6447 0.9899 0.0696 0.2231 -1.1025 3.3023 44.7863*** (0.0000) -2.5356 -2.0368

Panel B: Correlation Statistics Variable

ln(EX/IM)

ln(EX/IM) ln(IPChina) ln(IPMalaysia) RFX

1 0.1071 1 -0.2590 0.2089 1 0.0007 0.2131 0.7445

RFX

1

Note: Figures in parentheses are probability values. Std. Dev. denotes standard deviation. Asterisks *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively. Normality refers to Jarque-Bera normality test, where rejection of hull hypothesis implies non-normal distribution. Test for stationarity test refers to Augmented Unit Root (ADF) test, where Unit Root 1 is the model with intercept only and Unit Root 2 is the model with intercept and time trend. Rejection of null hypothesis reflects stationarity.

matrix is displayed. Generally, there is no multicolinearity problem, except that the industrial production of Malaysia is moderately correlated with the real exchange rates. This is not serious as the value is still below 0.75. The results of applying model (8) on all the time series are reported in Table 3.2. All involved series are stationary but they are still highly exposed to the trend and structural breaks dummy variables. The Asian currency crisis has a significant positive impact on the bilateral China-Malaysia trade balance, where China-Malaysia trade balance was shown to improve about 5 per cent


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Dfix

-4.3962***

-2.0753***

-3.7422***

Note: Figures in parentheses are standard errors. Asterisks *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively. RFX denotes the real exchange rates calculated using the formula ln([CPIMal*FXYuan/Ringgit]/CPIChina). Adj R2 denotes adjusted R2. Unit Root refers to ADF test on the residuals of model (9) with intercept only, and Unit Root 2 on the residuals of model (8) with no intercept and no time trend. Rejection of null hypothesis reflects stationarity.

D97

-5.7568***

Trend

ln(EX/IM) -0.4425*** -0.0001 0.0560 -0.2687*** 0.2635 (0.0312) (0.0003) (0.0643) (0.0367) ln(IPChina) 4.7167*** 0.0003*** -0.0550*** -0.0322*** 0.1456 (0.0065) (0.0001) (0.0134) (0.0076) ln(IPMalaysia) 3.7449*** 0.0059*** 0.0785*** 0.0260** 0.9645 (0.0099) (0.0001) (0.0204) (0.0116) RFX 0.3847*** 0.0025*** 0.0842* -0.0374 0.4421 (0.0229) (0.0002) (0.0471) (0.0269)

Intercept

Unit Root

Y

Adj R2

Table 3.2 China-Malaysia Trade Balance Model: De-trending and Removal of Structural Breaks Based on Model (8)


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as compared to before crisis. During the fixed ringgit regime, however, the trade balance deteriorated more than 25 per cent as compared to before crisis. The linear time trend is positive and significant for all except the trade balance series, which is negatively significant, suggesting a reduction in the bilateral China-Malaysia trade balance over time. As a result of significant loadings of the time tread and dummy variables, we decided to replace the original series with these residual series collected from model (8). To be cautious, we also report the ADF unit-root results on these new series at the last column in Table 3.2. As these residuals basically represent the component of the original time series after removing the mean, time trend, the 1997 structural break, and the fixed exchange rate regime over 1998-2005, the tested ADF model excludes the drift term and time trend. The unit root tests support these series are all stationary, including the real exchange rates. This implies that the nonstationary behaviour of real exchange rates reported in unit root tests in Table 3.1 is due to structural breaks. The coefficients estimated for model (9) are reported in panel A of Table 3.3. We report three model estimates. The first model, OLS, is the simple least square. This model is subject to various diagnostic problems. The R2 is low, the residual and residual square series are serially correlated, the error process content ARCH effects and the error distribution is not normal. As a result, we proceed to the second model, which is basically model (9) accounting for a standard GARCH (1,1) specification. This model basically takes care of the ARCH effects; however, it is still subject to serial correlation in the residual, non-normality error and worse, insignificant F-test. Thus we proceed augment the model to include autoregressive (AR) terms to model the correlation in the error process. This third model, which is termed as AR-GARCH, is free from all the above mentioned diagnostic problems. The AR-GARCH model is also better in the sense that it provides better goodness-of-fit, and lower AIC and SBC values. Thus, our discussion following will focus only on the AR-GARCH model. For the AR-GARCH model, all the coefficients estimated are statistically significant at 95% confident level or higher. Only two parameters are insignificant, the intercept and the coefficient for Malaysian income, YMY,t. As expected, with the demeaned right hand side variables, there is no statistical evidence to infer that is β 0 significantly different from zero. The coefficient for Malaysian income β 2 does not have the correct direction but since it is insignificant, this is not really a matter. For the rest, the direction are mostly consistent with theory, so as the magnitude. The result suggests that for every 1 per cent higher in China income, the trade balance will deteriorate for about 0.7 per cent. This implies


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Adj R2 SSR LogL AIC SBC DW F-statistic

OLS

0.0000 (0.0149) 0.4114 (0.3207) -0.6111 (0.2900)** 0.4492 (0.1253)*** – – – – –

0.0544 10.2721 23.0659 -0.1757 -0.1134 1.1998 5.1418 (0.0019)***

Panel B Diagnostics Statistics

C CHIP MYIP REX AR(1) AR(2) W ARCH GARCH

Panel A: Coefficient Estimates

0.0157 10.5419 40.2198 -0.3062 -0.1971 1.1166 1.5741 (0.1561)

-0.0189 (0.0153) -0.0674 (0.3358) -0.4637 (0.2810)* 0.3076 (0.1258)** – – 0.0039 (0.0017)** 0.1890 (0.0751)** 0.7333 (0.0878)***

GARCH

Table 3.3 China-Malaysia Trade Balance Model: Regression Results for Long-Run Elasticity

0.2280 8.1623 72.0340 -0.5864 -0.4453 2.0792 8.8984

0.0039 -0.7463 -0.3830 0.3891 0.4180 0.1339 0.0002 -0.0349 1.0176

(0.0000)***

(0.0268) (0.3224)** (0.2807) (0.1978)** (0.0575)*** (0.0658)** (0.0001)** (0.0175)** (0.0189)***

AR-GARCH


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70.1880 87.1430 42.8460 47.5730 18.7485 7.0944

OLS

(0.0000)*** (0.0000)*** (0.0000)*** (0.0000)*** (0.0000)*** (0.0288)**

49.7290 65.0400 2.5612 4.8927 1.9716 6.2902

(0.0000)*** (0.0000)*** (0.6340) (0.9610) (0.1603) (0.0431)**

GARCH 2.4164 15.2150 2.0655 6.8106 2.0803 0.4277

(0.2990) (0.1240) (0.3560) (0.7430) (0.1492) (0.8075)

AR-GARCH

Note: Figures in parentheses are probability values. Asterisks *, ** and *** denote significance at the 10%, 5% and 1% levels, respectively. Adj R2, SSR, LogL, AIC, SBC and DW denote adjusted R2, sum of square residual, log likelihood value, Akaike information criterion and Schwarz information criterion, and Durbin-Watson test, respectively. Q(4) and Q2(4) refers to Ljung-Box Q-statistics for checking autocorrelations in the residuals and squared residuals, respectively, for lags up to one quarter (4 months) and Q(12) and Q2(12) for lags up to one year (12 months). Normality and ARCH refer to Jarque-Bera normality test, and ARCH Lagrange multiplier test by Engle (1982), respectively. Test for stationarity refers to unit root test by Kwiatkowski-Phillips-Schmidt-Shin (1992), where Stationarity 1 is the model with intercept only and Stationarity 1 is the model with intercept and time trend. Rejection of null hypothesis reflects unit root.

Q(4) Q(12) Q2(4) Q2(12) ARCH Normality

Table 3.3 (continued) 72 ♦ Chee-Wooi Hooy and Tze-Haw Chan

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that when the income of China’s people increases, they might have demand more imports from Malaysia and thus worsen the bilateral trade balance with Malaysia. For the real exchange rates, the estimate shows that for 1 per cent devaluation in yuan/ringgit real exchange rates, bilateral China-Malaysia trade balance will improve for about 0.4 per cent. Basically a devaluation of yuan/ringgit means cheaper exports to Malaysia and more expensive imports from Malaysia, making China’s current account improved, i.e., either a bigger surplus deficit or a smaller deficit. However, the result implies that the process of trade adjustment is inelastic to their real exchange rates. This could be the result of incomplete pass-through of the currency effects on prices, the resistant in consumers to fully adjust to the new prices, or both. With a positive impact documented here for devaluation on trade, we thus can conclude that MLC is met, although the currency effect is inelastic. Besides, the trade balance process is also significantly depending on previous performances, with higher persistency from last month trade figure. The component of the variance process, i.e. the constant variance, ARCH and GARCH terms are all statistically significant. This implies that there is baseline volatility in the trade flows between China and Malaysia, and the magnitude of the trade balance fluctuation tends to persist from the previous volatility. The trace whether the currency effects follows a J-curve phenomenon, we plot the generalized impulse responses of China-Malaysia trade balance to unit shocks in real yuan/ringgit rates using an unrestricted VAR model as explained earlier, assuming the income series are exogenous. As we are analyzing monthly observations, the short run dynamics of trade adjustment to shocks in the real exchange rates is traced as far as 24 months to allow us to compare our result here with the literature that predominantly based on quarterly data. By theory, if J-curve is present, a country is able to correct external imbalances via exchange rate devaluation after temporal adjustments of external competitiveness, or otherwise. As shown in Figure 3.1, there is no clear indication of J-curve effect. The Chinese-Malaysian trade balance series depicted immediate positive adjustment to real exchange shocks from an initially negative position. A 1 per cent real depreciation of renminbi brings to a maximum of 4.5 per cent improvement in trade balance. The correction of trade reduces after the 3rd month and the impact of real depreciation die out gradually after 14 months. In other words, the volume effect occurs faster than price effect but after a moderate time period, the price effects become large enough to offset the volume effect that the trade balance improvements due to real depreciation die off.


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Figure 3.1 China-Malaysia Trade Balance Model: Response of Trade Balance to Real Exchange Rate Shocks .08 .06 .04 .02 .00 -. 0 2 -. 0 4

2

4

6

8

10

12

14

16

18

20

22

24

Note: The responses of China-Malaysia trade balance is traced up to 24 months. The impulse is generalized one standard error of yuan/ringgit real exchange rates derived from the 12-lag VAR modeling as shown in (10a) and (10b).

Conclusion This study deals with currency exposure of bilateral trade balance between China and Malaysia. We are motivated by the fact that both China and Malaysia, emerging and open economies, whom went through similar currency regime over the last decade, has relaxed their pegging to USD exactly the same day in 2005. Our sample covered the last 20 years of monthly frequency data. We follow a standard trade balance model relating bilateral trade to local and foreign incomes and their bilateral real exchange rates. One of our contributions in empirical modeling is that our modeling takes into account the structural impact of the 1997 Asian currency crisis on both China and Malaysia, as well as the period of pegging regime adopted by Malaysia during 1998-2005. Our result shows that real exchange rates play a significant role in the bilateral trade of China-Malaysia. The Marshall-Lerner condition is partially met and the currency effect is inelastic. However, the J-curve phenomenon


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is somewhat unobserved through the generalized impulse response analysis. The real depreciation of Chinese yuan poses an immediate correction of the Chinese-Malaysia trade imbalances but the effect does not last long. Additionally, the coefficients on domestic and foreign income show consistent signs to those predicted by economic theory where the China-Malaysia bilateral trading is demand driven but the income effect is greater for Malaysia. All in all, Malaysia holds better gains in the bilateral trading with China. Notes * Acknowledgement: The first author is gratefully acknowledging financial support from the incentive grant provided by Universiti Sains Malaysia. 1. Under MLC, to get a positive effect from devaluation, a necessary condition is that the demand elasticity of both exports and imports must exceed one. There is an excess supply of currencies when the exchange rate is above the equilibrium level and excess demand when it is below. Only with this condition a nominal devaluation will affect real exchange rates to enhance competitiveness and hence improves trade balance. 2. The J-curve stands as a short-run departure from Marshall-Lerner condition. A usual rationale for it is that exchange rate depreciation initially means cheaper exports and more expensive imports, making the current account worse (a bigger deficit or smaller surplus). After a while the volume of exports will start to rise because of their lower price to foreign buyers, and domestic consumers will buy fewer of the costlier imports. Eventually the trade balance will improve. 3. During the Asian Development Bank meeting on 6th May 2000, Chiang Mai (Thailand), ASEAN-10, China, Japan, and South Korea (collectively known as ASEAN10+3) agreed to create a network of regional currency swap arrangements, associated with surveillance and monitoring mechanisms. The initiatives began to take concrete when multiple countries signed swap arrangements in 2001, some with ceilings as high as $3 billion. These eye-catching initiatives parallel plans by China and Southeast Asian countries to form a Free Trade Area, ongoing sub-regional economic development projects and the efforts to regularize meetings among finance and trade officials, have constituted towards regional integration. 4. During the 9th ASEAN Summit on 7-8 October 2003, Bali (Indonesia), leaders from ASEAN, China, India, Japan and South Korea have expressed their strong support for the Bali Concord II as a solid platform to achieve an ASEAN Community based on political-security, economic and socio-cultural cooperation. Despite the countermand of trans-national crimes/terrorism and communicable diseases, these countries have propounded the economic integration of ASEAN (at regional and sub-regional level) and the establishment of Asian Bond as an alternative for regional financing.


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References Bahmani-Oskooee, M. and I. Miteza (2003), “Are Devaluations Expansionary or Contractionary? A Survey Article”, Economic Issues, 8 (2), pp. 1-28. Bahmani-Oskooee, M. and Y. Wang (2006), “The J Curve: China versus Her Trading Partners”, Bulletin of Economic Research, 58 (4), pp. 323-343. Bahmani-Oskooee, M. and A. Janardhanan (1994), Short-Run versus Long-Run Effects of Devaluation: Error Correction Modeling and Cointegration”, Eastern Economic Journal, 20, pp. 453-64. Engle, R.F. (1982), “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of United Kingdom Inflation”, Econometrica, 50, pp. 987-1007. Himarios, D. (1989), “Do Devaluations Improve the Trade Balance? The Evidence Revisited”, Economic Inquiry, 27, pp. 143-168. Hsing, H.M. and A. Savvides (1996), “Does a J-Curve Exist for Korea and Taiwan?”, Open Economies Review, 7, pp. 126-145. Krugman, P. and R.E. Baldwin (1987), “The Persistence of the US Trade Deficit”, Brookings Papers on Economic Activity, 1-2, pp. 1-43. Kwiatkowski, D., P.C.B. Phillips, P. Schmidt and Y. Shin (1992), “Testing the Null Hypothesis of Stationary against the Alternative of a Unit Root”, Journal of Econometrics, 54, pp. 159-178. Noland, M. (1989), “Japanese Trade Elasticities and the J-Curve”, The Review of Economics and Statistics, 71, pp. 175-179. Onafowora, O. (2003), “Exchange Rate and Trade Balance in East Asia: Is There a J-Curve?”, Economics Bulletin, 5, pp. 1-13. Pesaran, M.H. and Y. Shin (1998), “Generalised Impulse Response Analysis in Linear Multivariate Models”, Economics Letters, 58, pp. 17-29. Rose, A.K. (1991), “The Role of Exchange Rates in a Popular Model of International Trade: Does the Marshall-Lerner Condition Hold?”, Journal of International Economics, 30, pp. 301-316. Rose, A.K. and J.L. Yellen (1989), “Is There a J-Curve?”, Journal of Monetary Economics, 24, pp. 53-68.


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China-Burma Ties in 1954 ♦ 77

Chapter 4 China-Burma Ties in 1954: The Beginning of the “Pauk Phaw” Era Fan Hongwei

Introduction Although Burma was the first non-socialist country to recognize new China, the favourable beginning failed to facilitate development of China-Burma relations in the early period (1949-1953). On the contrary, their relations were “noncommittal and very cold” (MOF Archive File No. 105-00814-01 (1)). Both sides were suspicious and mistrustful to each other. China regarded Burma as an underling of imperialist countries. Burma feared that China would invade it and threaten its national security. The cold condition began to alter when two countries’ Premiers visited each other in 1954. After 1954, Beijing and Rangoon began to contact closely and frequently, and ChinaBurma relations entered the friendly “Pauk Phaw” (fraternal) era during the Cold War. Some have been written about general China-Burma relations in the Cold War, but little as yet has been done in the detail of their ties, particularly the shift in 1954. This study focuses on the manifestation, the causes and impact of the relations change. The turn of 1954 basically consisted of two dimensions: political and economic relations. Political Relations in 1954 With the symbol of exchange visit between two Premiers, Chou Enlai and U Nu, in 1954, China-Burma relations began to boom. Regarding the significance of the change in 1954 for two countries’ ties, Burma’s Premier U Nu had some statements: “China-Burma amity had not been established until my good friend, Premier Chou Enlai’s first trip to Rangoon.” “Before Premier Chou Enlai didn’t visit Rangoon, I should admit that there were some gaingivings between two countries’ peoples. In Burma’s side, many had such a feeling of fear whether China would subvert Burma’s government.”1 “Since 77


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Premier Chou Enlai visited Burma, new changes have occurred to ChinaBurma relations, and following the ‘Five Principles’, two countries developed amity, economic and cultural contacts.” (MOF Archive File No. 105-0081401 (1)) “When China was founded in 1949, our two countries’ relations were not friendly. Because China’s Premier visited Burma and I visited China, understanding between us increased. Basing on the new understanding, we issued statement of supporting the famous ‘Five Principles’. We signed economic and trade agreement, and cultural delegations visited each other.” (MOF Archive File No. 105-00446-04) In 1954, both sides consulted and exchanged views on the issues disturbing Sino-Burma relations, jointly advocated “Peaceful Coexistence Five Principles”, and took it as the “rudder of China-Burma relations.” 2 Concerning Chou’s trip to Rangoon and the joint statement, U Nu voiced that “your visit and our joint statement greatly promoted to more understanding of two countries.” (MOF Archive File No. 105-00037-01 (1)) “In the beginning, notwithstanding, we were still suspicious to China’s intention.” However, Premier Chou’s visit and the announcement of “Five Principles” “made the tension assuaged”.3 Also, Chou agreed with U Nu. He said “When two neighboring and newly founded countries with different political system begin to contact, it is natural that both fear and misunderstand each other.” “These apprehensions, nevertheless, were gradually allayed” because of two Premiers’ exchange visit and the establishment of “Five Principles”.4 The establishment of “Five Principles” as the guide of China-Burma relations, of course, was important symbol and reason of the shifted relations in 1954, but more importantly, two parties communicated how to implement “Five Principles”, and reached a consensus on the issues of common interest. Firstly, the contact of two countries’ leaders increased understanding and the confidence of developing bilateral relations. Both CCP and Anti Fascist People’s Freedom League (AFPFL) came into power for the first time, lacked diplomatic experience, and were prejudiced against each other. Before 1954, CCP thought Burmese leaders as proletariate’s enemy.5 Burma feared that Chinese leaders were like Hitler (Works of Mao Tse-tung, Vol. VI, p. 382), and was afraid that Chou Enlai was a cocky, irascible, and trickish statesman (Yunnan Institute of History Studies, 1954: 5). U Nu ever articulated his psychological change before and after his trip to Beijing in 1954. “When I reached Beijing just now, I had some apprehensions.” However, “our apprehensions disappeared after the visit of eleven days.”6 In December, 1954, Mao Tse-tung met U Nu visiting Beijing, and praised his visit to China. Mao expressed that China wanted to establish diplomatic ties with Thailand. Nevertheless, “Thailand said it was afraid that China could


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invade it, but Burma also feared such invasion. However, Burmese uses the means of developing friendly relations with us, and comes here to find out whether we will invade it. And yet, Thailand even is reluctant to come to China to have a look. If you have suspicion and dissatisfactory, you can speak out.” (Works of Mao Tse-tung, Vol. VI, pp. 377-379) During the same meeting, U Nu also admitted that “in the past, we dare not say what we want to say, fear that you mistake us for UK’s and U.S.’s lackey, and our opposition parties in Burma report such condition to you. However, after we meet each other now, discuss issues concerned and understand each other, we won’t fear to speak straightforwardly any longer. This is the most significant achievement of my trip to China.” (Works of Mao Tse-tung, Vol. VI, p.379) Moreover, Chou Enlai’s distinct personal charm impressed Burmese who feared China, and increased Burmese leadership’s favour to China. For example, after Chou’s trip to Rangoon, some Burmese felt that “Premier Chou is young and grace”, respected Burmese traditional custom, and “is adept at diplomacy and a statesman.” (MOF Archive File No. 105-00259-03 (1)) “His behavior shows that he is a Premier of not a power but a fraternal country. Premier Chou’s attitude removed our wrong guesses in half an hour. Since then, we completely believe: if a Premier treats a small country so modestly and hospitably, the country and people which he governs will be more generous and hospitable.”7 In regard to the effect of Chou’s visit to Burma, U Nu wrote to Chou that “for you individual’s aspect, for the whole China’s aspect, you have made a wide circle of friends here.” (MOF Archive File No. 105-00037-01 (1)) Secondly, Burma made promises on the issues which China worried about, and it allayed Beijing’s suspicion. After new China’s birth, Beijing led itself into going to Korea War and Indochina War. U.S. and its allies in Asia contained China, so China’s peripheral security situation was increasingly worsening then. Burma shared over two thousand kilometers land border with China. Consequently, if Burma joined west camp, China’s southwest security would be endangered. The economic agreement signed by Burma and U.S. in 1950 had caused Beijing’s worry. During U Nu’s first visit to Beijing in 1954, he especially mentioned the issue. “Although Burma has no the ability to interfere in China’s internal affairs by itself, it is able to get China into a mess if it allows itself to be as the underling of China’s enemies.” “We can provide some vital loci which are used as navy and air force strategic bases to launch attacks on PRC. We can also facilitate Chinese enemy’s espionage and subversion in China.”8 Regarding those possibilities, U Nu gave Beijing his promises that “through fair and foul, we by no means become the underling of any country”; “We do anything to jeopardize peace in no case”; Burma


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“accepts unilateral aid which leads any party’s suspicion of the two countries at no time, and even have never the thoughts of accepting such aid. We won’t adopt the demarche causing China’s apprehension in terms of other some county’s instigating.”9 Thirdly, China’s engagements about what Rangoon feared partly removed the latter’s suspicion. Before Chou Enlai visited Burma, Rangoon feared and worried about that Beijing exported revolution and subverted its regime largely because of CCP’s attitude to BCP and Burma’s civil war. During Liu Shaoqi visited Soviet Union in August, 1949, he reported to Stalin that in East Asian countries like Vietnam, Malaya and Burma, “proletariat has no right to pursue revolution, and the means of revolution struggle have been or will be armed guerrilla warfare” (Works of Liu Shaoqi since the Establishment of PRC, Vol. 1, pp. 50-51). At the Labor Union Conference in Asian and Australian Countries in November, 1949, Liu asserted that “we should give all kinds of moral and physical aids to proletariat and labor needing help in the countries reigned by capitalism and imperialism”, and shoulder international responsibility to aid all capitalism countries, particularly Asian countries (ibid.: 177). In 1950, Liu stated in a CCP’s document that “it’s CCP and Chinese people’s duty-bound international responsibility, and one of the most important means strengthening China’s revolutionary victory in the international circumstance to use all possible measures to aid Communist Party and people in oppressed Asian nations, and struggle for their liberations.” (Chronicle of Liu Shaoqi: 1898-1969, Vol. 2, p. 245) In 1954, Chou Enlai claimed in Rangoon that according to CCP’s idea, “revolution can not be exported. If so, there is no chance of success. Communist Parties of various countries win out only by themselves.” (Chronicle of Zhou Enlai: 1949-1976, Vol. 1, p. 393) Chou’s Rangoon speech on Communist Party’s “Export of Revolution” had special signification for Burmese. Chou’s visit to Rangoon in June, 1954, did have positive impact on Burma’s policy toward China according to U Nu’s address in Beijing on December 2 in the same year. Furthermore, the joint statement issued by two countries’ Premiers during Chou visited Burma ad hoc stressed that “two Premiers restate: every country’s people have the right of choosing state system and lifestyle, and other countries should not interfere in the choice. Revolution fails to be exported. At the same time, the common volition of the people in one country should not suffer foreign interference.”10 With regard to Burma’s turbulent situation after independence, various insurrections and the possibility of external interference, Mao Tse-tung told U Nu in Beijing in December that “we wish the peace in Burma. Concerning how you acquire the peace, it needs yourself to deal with it…. Each country


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solve its problem by itself.” “Each country has several kinds of parties. With respect to these parties, we can’t allege to oppose or support some party. The counterpart which we negotiate with must be each country’s government. We won’t invade Burma as U.S. interfered in Guatemalan revolution. We won’t move forces to fight into Burma, and the ambassador, Yao Zhongming, meanwhile, acts as the undercover in Burma. Yao will do it in no case. If he does it, we will immediately dismiss him from his post by all means.” (Works of Mao Tse-tung, Vol. VI, pp. 374-376) In the Cold War, the populous Overseas Chinese in Southeast Asia ever were looked upon as the “Fifth Column”. Although the population of Overseas Chinese in Burma was not large, Rangoon still worried about the issue of Chinese there. Burmese fear focused on political role and “dual nationality” of Overseas Chinese. Therefore, Mao pledged that “we don’t establish Communist Party in Overseas Chinese community, and its branches have been dismissed. We have done so in Indonesia and Singapore. We enjoined Overseas Chinese not to join in political activities in Burma. They only can participate in some activities permitted by Burma’s government, such as celebration.” “There are some radicals in Burma Overseas Chinese community, and we persuade them from interfering in Burma’s internal affairs. We instruct them to abide by Burma’s law, and don’t contact with Burmese opposition parties fighting with Burma’s government.” (ibid.: 376-377) Mao’s promise on Overseas Chinese issues was affirmed by the ChinaBurma communiqué in December, 1954. It stated that Overseas Chinese should “respect law and social custom in Burma, and can’t participate in local political activities.” “Concerning the issue of colony’s nationality, two countries’ governments will negotiate it through normal diplomatic channel as soon as possible.”11 When U Nu visited China, two Premiers, after consulting, thought it’s necessary to establish consulate general each other in two right cities. In fact, this suggestion was also a step of assuaging Burmese apprehension on China. In this regard, Mao explained that “in the past, Burma thought Yunnan dark, and didn’t know how many troops Beijing stationed there, what’s Chinese trick aiming at Burma. Burma fears us very much. So we suggested Burma establish a consulate general in Yunnan to watch us.” (MOF Archive File No. 105-00339-01 (1)) Economic Relations in 1954 Like Sino-Burma political relations, the economic ties also shifted in 1954. On April 22, 1954, China and Burma signed the first economic trade agreement (valid for three years). According to the agreement, China exported


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coal, silk, silk fabrics, cotton fabrics, paper, agricultural implements, light industry product, handicraft, porcelain enamel, porcelain, canned food, tea, and cigarette to Burma. Burma exported rice, rice product, pulse seedcake, mineral, timber, rubber and cotton to China.12 On November 3, 1954, both signed goods exchange protocol of Burmese rice and Chinese commodities, and the contract that China bought 150,000 long tons Burmese rice. Also, U Nu’s first trip to Beijing promoted bilateral economic relations. After negotiation, “both Premiers think that it’s necessary to open ChinaBurma airline, resume road traffic, and conclude post agreement. In order to develop the trade between two countries, two Premiers agree that China will annually import 150,000-200,000 long tons rice from Burma from 1955 to 1957; during the same period, Burma will import industry equipment and daily necessities from China.”13 Although the amount, value and category involved in the 1954 trade agreement and contract cut no figure in two countries’ foreign trade, it symbolized that both sides changed the policy of wait and see in the early period. The 1954 shift of China-Burma economic nexus was further materialized in the subsequent years soon. The trade value between two countries in 1955 increased by 30 times than one in 1954, and the number of 1956 rose 44 per cent. The 1954 change of China-Burma economic ties was attributable to not only the promotion of political relations shift but also the trade as the lever for political relations. China mainly imported rice, cotton, rubber, and other raw materials from Burma, and exported cotton product, daily commodities, machine and equipment. Then the level of two countries’ economy and industrialization were backward but China still had some comparative advantages over Burma. Consequently, in the China-Burma bilateral trade, “the need of Burma’s production and life can easily be met by our country’s export while its export commodities were inconsistent with the need of China’s import.” (MOF Archive File No. 105-00603-01) In October, 1954, when Chou Enlai met Burma’s foreign trade delegation in Beijing, he engaged that “henceforth we prepare to meet the Burma’s import need, and hope that Burma can list the needed goods.” “In the following two years, if China-Burma trade can’t balance, we are willing to encash the trade with special funds. The method is special in our foreign trade because we ordinarily swap.” (MOF Archive File No. 105-00130-01 (1)) Chou’s promise clearly showed that China was taking advantage of trade to promote political relations. The case in point was the rice trade between two countries. Rice was vital to Burma’s economy. However, “rice is also one of China’s staple export goods, impossible to buy a great deal of Burma’s rice with


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foreign exchange. Only when Burma imminently asks us to buy its rice, we can consider buying some rice in order to indicate favour and help Burma out of difficulty.” (MOF Archive File No. 105-00603-01) China Vice-Minister of Foreign Ministry, Zhang Wentian, also stressed the significance of promoting economic relations with Asian countries at the session of China’s ambassadors in Asia in 1956. “Because we are a power, we don’t need some goods such as Burma’s rice at times, but we still buy a bit.” (Chronicle of Zhang Wentian: 1942-1976, Vol. 2, p. 1021) In December, 1954, the memorandum which U Nu gave to China’s counterpart mentioned that “the contract of ordering 200,000 tons 1953 Burma’s rice was signed by two countries’ government on November 3, 1954. About the rice produced in 1953, we are also not sure whether it is edible. So China need dispatch investigators to Rangoon to ‘very carefully inspect’ it.” (MOF Archive File No. 105-00036-01 (1)) This indicated both sides had not specific stipulation on the ordered rice, and Beijing’s intention of promoting bilateral ties through rice trade was self-evident. Beijing’s goodwill in the rice trade indeed gained Rangoon’s applause, and Premier U Nu publicly praised it many times. On December 2, 1954, U Nu stated in Beijing that “there is a great deal of overplus rice. Without buyer, we will be caught in dilemma. Meanwhile, due to war destruction, my country’s economy is backward. If the rice can’t be sold, it will undermine Burma’s economic base.” Concerning China’s purchase of Burmese rice, “we think the generous action is a friendly illustration.” (Yunnan Institute of History Studies, 1954: 7) In the same year, U Nu remarked at the ceremony of Burma’s National Day that China bought Burma’s rice in order to help Burma. “Actually, new China has surplus rice to export, but considering Burma’s rice market, China took the exciting steps. And, the profit that Burma got from China exceeded Rangoon’s original hope.”14 The Cause of China-Burma Relations Shift The shift of China-Burma relations in 1954 was mostly because China changed its foreign policy, particularly the policy toward Burma while Rangoon actively responded to Beijing’s change. International Situational Factors In the early 1950s, establishing military bases, increasing U.S. troops number in the countries around China, U.S. signed a series of military treaties with China’s neighbouring countries, and formed a military encirclement against


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China. For example, Thailand-U.S. Military Assistance Agreement (October 17, 1950), Philippines-U.S. Mutual Defence Treaty (August 30, 1951), KoreaU.S. Mutual Defence Treaty (October 1, 1953), U.S.-Taiwan Mutual Defense Treaty (December 2, 1954), U.S.-Japan Mutual Defense Assistance Agreement (March 8, 1954), and Manila Pact (September 8, 1954). Chou Enlai delivered the “Report on the Work of the Government at the First Session of the First National People’s Congress” on September 23, 1954, which stated that “in order to build a prosperous socialist industrialized country, we need a peaceful environment and world. Therefore, we should strengthen and develop unity and collaboration with Soviet Union as well as other socialist countries, attach importance to the peaceful collaboration, the promotion of economic and cultural ties with all countries, particularly Southeast Asian and other neighboring countries.” (Song and Li, 1997: 159) Therefore, Beijing made efforts to break out of U.S. encirclement, sought the support from Asian and African countries, particularly its periphery. These efforts became main mission of China’s diplomacy after Korean War ceasefire. “To this end Chou encouraged the formation and enlargement of the ‘area of peace’, composed of such countries as Burma, Cambodia, Ceylon, India, Indonesia, and Nepal. In contrast to the initial negative communist attitude towards the ‘neutral forces’, Chou stressed the importance of the ‘uncommitted countries’ and devoted much attention to their growing role in fortifying ‘the international forces of peace.’” (Shao, 1979: 326) China’s Policy toward Burma Beijing pursued the foreign policy of “leaning to one side” and insisted that the world was divided into two antagonistic camps and neutralism impossibly existed between them when CCP seized power in 1949 (Liu, 1951: 25). All non-socialist nations were classified as “stooges” or “running dogs” of imperialism. However, both domestic need and the international environment in early 1950s impelled Beijing to alter its black and white-with us or against us-conception on the world politics, and to begin to stress national interests in its foreign policy-making. “In the development of foreign relations Chinese policy shifted gradually away from attempting to drive Western influence out of Asia by direct confrontation or unequivocal support for revolutionary wars, and toward efforts to win Asian neighbors away from alliances with the West through offers of peaceful coexistence.” (Van Ness, 1970: 12) In 1952, Chou Enlai spelled out that with respect to neutral countries, “we can’t be hostile to them and push them to enemy’s camp. We can make friends with them.” As far as the nationalist countries in Southeast Asia which


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established diplomatic relations with Beijing were concerned, “we will try for their neutral stance at war, and making them keep imperialism at arm’s length at peace.” (Selected Diplomatic Writings of Chou Enlai, pp. 52-54) In 1954, China’s new foreign policy formed, which focused on breaking through U.S.’s containment and encirclement, uniting all countries which wished to maintain peace with China, and create a peaceful, stable regional environment for its domestic economic development and recovery. The new policy was characterized by building “collective peace and security” and expanding “peaceful area” in order to form a safe buffer zone between China and western camp. “This new course in Peking’s foreign policy was apparently directed by three major considerations: first, the enhancement of China’s national security, second, the need for diplomatic flexibility, and third, Peking’s quest for major power status.” (Show, 1972: 37) “To achieve this end Peking would respect the concept of non-alignment as a legitimate approach to Cold War issues.” (Shao, 1979: 324) On July 8, 1954, Mao Tse-tung gave 11 instructions on China’s diplomacy which included: “begin to establish Southeast Asian peace zone, effect and develop cooperation on the zone, and sign non-aggression pact or collective peace treaty”; “unite all peaceful forces (including government), isolate and split up U.S.”; “International Peace and United Front”, etc. (Biography: Mao Tse-Tung 1949-1976, Vol. 1, pp. 562-563) In August, 1954, Chou Enlai spoke at the 33rd session of central government that it’s necessary to insist on and carry out “Peaceful Coexistence Five Principles”. “We believe…to establish more and broader peace zone in Asia so that these areas won’t become the hothouse where U.S. invader group wage war and organize military group. This central government will strive for Asia collective peace in the light of this guideline.” (MOF Archive File No. 206-Y0037, in PRC Foreign Ministry Bureau of Archives, 2006: 495) The shift of China-Burma relations in 1954 was one of the results of the changed China’s foreign policy, a logical approach of seeking peripheral environment featuring peace and security for Beijing. On December 2, 1954, Chou Enlai claimed that together with Burma, China “will struggle to implement ‘Peaceful Coexistence Five Principles’, establish and expand peaceful zone, and maintain Asia and World peace.”15 In addition, the communiqué released during U Nu visited Beijing in 1954 referred that “two countries’ Premiers expressed deep concern over strengthening and expanding peaceful area.”16 On China’s part, the change of Sino-Burma relations resulted from Beijing’s new foreign policy. However, Chinese appeal for “Asia Peace Zone” also could not go without Rangoon’s interaction and support.


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Burma’s Policy toward China After independence, Burma formulated neutralism and non-alignment foreign policy. It was between 1948 and 1954 that Rangoon established its foreign policy. Burma didn’t have a clear policy on non-alignment in the early years after independence, and was simply groping in the dark (Pakem, 1992: 29). During Rangoon framed neutralism policy, at least the followed factors strengthen its determination and promoted the formation of the policy. At the end of 1950, The People’s Liberation Army (PLA) entered Tibet and Korean War. Chinese violence action made Burmese see new China’s strike force and fatalness. In particular, “the experience of Korea convinced them that they would have to avoid at almost any cost the possibility of becoming a battlefield for the Western Nations-Communist conflict.” (Stephens, Ma, Frgs, 1963: 49) On March 8, 1951, Burma’s Premier reaffirmed his government’s determination to adhere to its policy of neutrality. By the beginning of 1951, both Burma and India had definitely perceived the necessity of a friendship with China, which had cast her shadow over Asia (Uma Shankar Singh, 1979: 164). Consequently, U Nu explained that the reason of performing neutralism foreign policy by his government was because Burma located in the sphere of influence of two rival camps; Burma’s military and economic powers were weak; it defended itself (U Nu, 1955: 1). Among these reasons, China was a major contributing factor. “Burma’s non-alignment is primarily to assure China of non-aggression from Burmese soil and to avoid destruction of Burma in another war.” (Chang, 1960: 122) “Fear of antagonizing China has also been at least partially responsible for Burma’s policy of neutralism.” (Thomson, 1957: 336)17 After Kuomintang (KMT) troops who had been defeated and driven from the mainland fled to Burma, Rangoon attempted to solve the problem through UN channel. Nevertheless, because of powers’ support, KMT issue was not only effectively solved but more serious. By 1953, KMT troops in Burma had became more powerful with the support of Taiwan and U.S., and its threat to Burma’s national security was more dangerous and bigger. The Burmese feared that Beijing might use the presence of the KMT forces as an excuse to invade Burma. In 1952, PLA crossed the disputed border, “1941 Line”, into Burma to annihilate KMT forces. Hence, Burmese had good reasons to worry. “The result of this experience in the United Nations was to make most Burman leaders feel that their original hopes that membership in the United Nations offered a small nation like theirs protection against outside interference were changed…. It was also quite apparent after Burma’s disillusionment with the United Nations, as a protector of the security of


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small states as shown in the case of handling of the KMT issue by this body, that the Burmese government began to move towards closer friendly relations with Communist China.” (Uma Shankar Singh, 1979: 171-172) At the same time, Beijing also soothed Rangoon’s anxieties. China offered assurances that so long as adequate steps were being taken against the KMT troops, the issue would not be a cause of trouble between two nations (Panikkar, 1955: 169). China’s forbearance on the KMT issue in Burma created a favourable impression in Rangoon, and made Burmese see the possibility and hope of keeping peace and friendly relations with its northern neighbour. “China’s attitude on the matter was one designed to indicate that it only harbored peaceful intentions and friendly feelings toward Burma and this undoubtedly had the effect of making the Burmese government more receptive to the ‘peace offensive’ that was launched in 1954.” (Holmes, 1969: 15-16) Furthermore, India and Burma established cordial relations, and two countries’ leadership often consulted about world affairs. New Delhi shaped non-alignment foreign policy and took friendly attitude to Beijing then. These had unneglectable impact on Burmese policymaking of diplomacy. Also, the communists and the socialist elements within Burma forced the U Nu government to appear non-aligned. Therefore, between 1951 and 1953, Rangoon gradually transmitted more and more goodwill to Beijing, such as the vote about China in UN during the Korean War, approving private shipments of rubber to China, supporting new China’s seat in UN.18 “On the part of Burma to please Communist China had become quite unmistakable by the middle of 1953.” (Dai, 1961: 134-135) During the Korea War, Rangoon’s and Delhi’s attitudes toward Beijing’s action in Korea also pushed China to reorient its policy to win the nationalist government to the side of socialist camp and utilized their neutrality in world politics. Rangoon and Delhi refused to join in branding China as an aggressor in Korea in January, 1951. In the same year, Burma, India and some other Asian-African countries abstained on the UN strategic war materials embargo against China resolution. Additionally, Burma’s private company exported some rubber to China although its volume was modest during Korea War (Xu, 1981: 100-102). Nationalist countries such as Burma and India adopted different policy toward China from western countries. This caused Beijing to reevaluated neural countries in world politics and placed them into the united front list. In addition, the influence of the change of Soviet Union’s foreign policy shouldn’t be ignored. While China gradually adjusted its policy toward neutral counties, Soviet Union’s position on those counties further drove the change of Beijing’s policy toward Burma. After Stalin’s death on March,


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1953, Moscow begun to seek detente with western camp and think much of its relations with Asian neutral countries. Russian leaders emphasized “peaceful coexistence” and peaceful competition between communist and non-communist countries. When CCP partly gave up previous principle with ideology as exclusive guide line of foreign affairs, changed viewpoints on neutral countries, and sought to establish and expand peaceful zone in Asia, Beijing’s policy shift cause Burma which attempted to keep friendly relations with China resonate. Both found common interest soon. Conclusion With the end of Korea War, both domestic pressing needs for peaceful environment necessary to recover and develop economy and increasing pressure of U.S. containment policy against China had much to do with Beijing’s pursuit of new foreign policy, “Peace and United Front” focusing on national interest, ending the policy of “putting the house in order before inviting guests” from 1954. 1954 saw the shift of China-Burma relations. However, Burma’s fear and distrust on China reflected in the early period after the establishment of diplomatic relations didn’t disappear and continued throughout the Cold War, whose degree varied over time. Although China changed its attitudes toward neutral countries and adopted “peaceful coexistence” policy, the cause behind its change, dual track diplomacy of party to party and government to government foreshowed that the “Pauk Phaw” relation was short-lived. Behind the change of China’s foreign policy in 1954, Beijing hoped to corrode the U.S.-supported anti-Communist alignment by fostering Asian solidarity and neutralism, which had slowly developed in reaction to its own “hard” policies. “It hoped to offset the pull of SEATO which was under active consideration at that time. Its new line sought, in short, to mobilize Asian sympathies against Western supported military alliances and bases and to divide Asians from the West, as well as to create a benign image of Communist China and reduce fear of the Communists. Above all, Peking hoped throughout Asia to create sympathetic attitudes toward Peking and the entire Communist bloc.” (Barnett, 1960: 101-102) Therefore, for Beijing, the “peaceful coexistence” line was simply a maneuver, and didn’t mean China abandoned its long-run aim of world revolution. Chinese hoped to attain multiple aims through the maneuver: unite neutralist countries and alleviate their suspicions to new China; alienate western camp; expand foreign trade (Liu, 2005: 62).


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On November, 1957, Mao articulated at the meeting of Standing Committee of CCP Central Political Bureau that “now, the international community generally recognizes the ‘Peaceful Coexistence Five Principles’ but whether the principles can be adhered to is another problem. Firstly, U.S. fails to do it, and whether Nehru can completely stick to it still needs to be observed. We have abided by the principle. In terms of the foreign policy and the relations between different countries, it’s true that they should be based on the principles. In respect of international communism movement, the general line of foreign relations of one communist party, nevertheless, can’t be restricted in scope to “peaceful coexistence” principles. Because communist countries need supporting and helping each other; communist parties in power needs supporting world revolution and the other nonofficeholding communist parties in capitalist countries; independent movements in colony and semi-colony, and international labour movement need supporting. In conclusion, we should fulfill the obligation of proletarian internationalism. Therefore, ‘peaceful coexistence’ can’t become the general line of one communist party.” (Wu, 1999: 152) Mao’s speech reflected China’s foreign policy within a conceptual framework of contradiction: sticking to “peaceful coexistence” on the one hand and opposing imperialism and supporting world revolution on the other hand. The duality of China’s foreign relations was characterized by party to party relations and state to sate relations. Consequently, the earlier “peaceful coexistence” emphasis would be replaced by the ideal of national revolution, a more militantly anti-imperialist policy when Chinese leadership judged that suitable opportunity for revolution arose. China’s contradictory foreign policy doomed the rift between Beijing and Rangoon in 1967. Notes 1. “Premier Chou Enlai Hosted Premier U Nu in Kunming”, Xinhua Semi-Monthly, No. 9, 1957, p. 56. 2. “Joint Statement of China and Burma’s Premiers”, Xinhua Monthly, No. 7, 1954. 3. “Premier U Nu’s Speech at the Banquet”, Xinhua Monthly, No. 1, 1955. 4. “Premier Chou Enlai’s Speech at Farewell Banquet”, Xinhua Monthly, No. 1, 1955. 5. “Burmese People’s Struggle”, People’s Daily, May 10, 1948. 6. “Premier U Nu’s Speech at farewell Banquet”, Xinhua Monthly, No. 1, 1955. 7. “Premier U Nu’s Speech at the Banquet”, Xinhua Monthly, No. 1, 1955. 8. “Premier U Nu’s Speech at Farewell Banquet”, Xinhua Monthly, No. 1, 1955.


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90 ♦ Fan Hongwei

9. “Premier U Nu’s Speech at Farewell Banquet”, Xinhua Monthly, No. 1, 1955. 1 0. “Joint Statement of China and Burma’s Premiers”, Xinhua Monthly, No. 7, 1954. 11. “Joint Communiqué of China and Burma’s Premiers”, People’s Daily, December 13, 1954. 12. “China and Burma Sign Trade Agreement Valid for Three Years”, People’s Daily, April 23, 1954. 13. “Joint Communiqué of China and Burma’s Premiers”, People’s Daily, December 13, 1954. 14. “Premier U Nu’s Report at the National Day Meeting”, (Rangoon) China’s Daily, November 22, 1954. 15. “Premier Chou Enlai’s Speech at the Banquet Hosting Premier U Nu”, Xinhua Monthly, No. 1, 1955. 16. “Communiqué of China and Burma’s Premier”, Xinhua Monthly, No. 1, 1955. 17. For other similar arguments, see Rose (1963: 24); Johnstone (1963: 164); Trager (1964: 61). 18. During this period, about the detail of how Rangoon pleased Beijing, see Dai (1961: 135).

References “A Talk Account of Premier Chou Enlai Meeting Burma’s Delegation”, Archive of Ministry of Foreign Affairs of People’s Republic of China, File No. 105-0013001 (1). “Abstract of Burmese Statesman U Nu’s Speech (10.a.m., October 13, 1955)”, Archive of Ministry of Foreign Affairs of People’s Republic of China, File No. 105-00446-04. “Account of Chairman Mao Tse-tung’s Talk with Visiting Burmese Vice-Premiers, U Ba Swe and U Kyaw Nyein”, Archive of Ministry of Foreign Affairs of People’s Republic of China, File No. 105-00339-01 (1). Barnett, A. Doak (1960), Communist China and Asia: A Challenge to American Policy, New York: Random House, Inc. Biography: Mao Tse-Tung 1949-1976, Vol. 1, Beijing: Central Compilation Press, 2003. “Burmese Officials and Press’s Response to Chou Enlai’s Trip to Burma”, Archive of Ministry of Foreign Affairs of People’s Republic of China, File No. 105-0025903 (1). “Burmese Premier U Nu’s Letter to Premier Chou Enlai about China-Burma Rice Trade”, Archive of Ministry of Foreign Affairs of People’s Republic of China, File No. 105-00036-01 (1). “Burmese Premier U Nu’s Letter to Premier Chou Enlai on the Distorted Coverage of Burma’s Press on China-Burma Joint Statement”, Archive of Ministry of Foreign Affairs of People’s Republic of China, File No. 105-00037-01 (1).


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Chang, David Wen-wei (1960), “A Comparative Study of Neutralism of India, Burma and Indonesia”, University of Illinois, Ph.D. dissertation. “Chou Enlai’s Report on Diplomacy at the 33rd Session of Central People’s Government Committee (August 11, 1954)”, File No. 206-Y0037, in PRC Foreign Ministry Bureau of Archives (ed.) (2006), Selected Diplomatic Documents of PRC: The Geneva Conference in 1954, Vol. 1, Beijing: World Knowledge Press. Chronicle of Liu Shaoqi: 1898-1969, Vol. 2, Beijing: Central Compilation Press, 1996. Chronicle of Zhang Wentian: 1942-1976, Vol. 2, Beijing: CCP History Press, 2000. Chronicle of Zhou Enlai: 1949-1976, Vol. 1, Beijing: Central Compilation Press, 1997. Dai, Shen-Yu (1961), “Peking and Rangoon”, The China Quarterly, No. 5, JanuaryMarch. Holmes, Robert Alexander (1969), “Chinese Foreign Policy Toward Burma and Cambodia: A Comparative Analysis”, Columbia University, Ph.D. dissertation. Johnstone, William C. (1963), Burma’s Foreign Policy: A Study in Neutralism, Cambridge: Harvard University Press. Liu Shaoqi (1951), Internationalism and Nationalism, Beijing: People’s Press. Liu Zhiyong (2005), “Chinese National Identity and the Choice of Diplomatic Strategies”, China Foreign Affairs University, Ph.D. dissertation. Pakem, B. (1992), India Burma Relations, New Delhi: Omsons Publications. Panikkar, K. M. (1955), In Two Chinas: Memoirs of a Diplomat, London: George Allen and Unwin. “Premier U Nu’s Parliament Speech (abstract)”, Archive of Ministry of Foreign Affairs of People’s Republic of China, File No. 105-00814-01 (1). Rose, Jerry (1963), “Burma and the Balance of Neutralism”, The Reporter, XXVIII, No. 1, January 3. Selected Diplomatic Writings of Chou Enlai, Beijing: Central Compilation Press, 1990. Shao, Kuo-kang (1979), “Chou Enlai’s Diplomatic Approach to Non-Aligned States in Asia: 1953-60”, The China Quarterly, No. 78, June. Show, Kuo-kong (1972), “Communist China’s Foreign Policy toward the Non-aligned States with Special Reference to India and Burma, 1949-1962”, University of Pennsylvania, Ph.D. dissertation. Song Enfan and Li Jiasong (eds) (1997), The Chronology of PRC’s Foreign Affairs, Vol. I, Beijing: World Affairs Press. Stephens, M. D., Ma, Frgs (1963), “The Sino-Burmese Border Agreement”, Asian Review, Vol. LIX, No. 217, 78th Year, January. “Summary on Ten-year Sino-Burma Economic and Trade Ties by China’s Embassy in Burma”, Archive of Ministry of Foreign Affairs of People’s Republic of China, File No. 105-00603-01. Thomson, John Seabury (1957), “Burma: A Neutral in China’s Shadow”, Review of Politics, 19.


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Trager, Frank (1964), “Burma and China”, Journal of Southeast Asian History, Vol. 5, No. 1, March. U Nu (1955), “Burma’s Neutral Policy”, Burma, January, Vol. V, No. 2. Uma Shankar Singh (1979), Burma and India, 1949-1962: A Study in the Foreign Policies of Burma and India and Burma’s Policy towards India, New Delhi, Bombay, Calcutta: Oxford & IBH Publishing Co. Van Ness, Peter (1970), Revolution and Chinese Foreign Policy, Los Angeles and London: University of California Press. Works of Liu Shaoqi since the Establishment of PRC, Vol. 1, Beijing: Central Compilation Press, 2005. Works of Mao Tse-tung, Vol. VI, Beijing: People’s Press, 1999. Wu Lengxi (1999), A Debate for Ten Years: Memoirs on Sino-Soviet Union Relations 1956-1966, Beijing: Central Compilation Press. Xu Simin (1981), An Overseas Chinese Experience: Xu Simin Memoir, Hong Kong: The Mirror Post Cultural Enterprises Co. Ltd. Yunnan Institute of History Studies (ed.) (1954), Compiling Materials of China-Burma Friendly Relations, Vol. 2, No. 2.


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Economic Cooperation between Malaysia and Guangdong ♦ 93

Sub-regional and Provincial Perspectives


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94 ♦ Zhang Mingliang


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Chapter 5 Economic Cooperation between Malaysia and Guangdong: Current Situation, Cause and Prospect Zhang Mingliang

Introduction Due to the further progress in Sino-Malaysian relations, which have deepened mutually beneficial cooperation and expanded exchange in all fields, much scholarly attention has been devoted to the Sino-Malaysian relations that include political1, economic2 and other issues. Guangdong (GD) province’s economic cooperation with Malaysia, which has played a leading role in Sino-Malaysian cooperation in economy, has received relatively little study, although there is much news coverage on it, which benefited this chapter. Drawing upon information from the Ministry of Commerce of the People’s Republic of China3, Malaysian External Trade Development Corporation (MATRADE)4 and Department of Foreign Trade and Economic Cooperation of Guangdong Province5, this chapter will examine the economic cooperation between Malaysia and Guangdong, focusing on the issues that push for the cooperation and the prospect. Trade between China and Malaysia It is necessary to review the trade between Malaysia and China, of which Guangdong plays the leading role. It could be said that extensive linkages between Malaysia and China in trade has a long history and has worked better than before. Total trade between Malaysia and China over the last decade increased more than ten fold from US$3.79 billion in 1996 to US$27.50 billion in 2006. China’s share of Malaysia’s total global trade increased from 2.41 per cent in 1996 to 9.43 per cent in 2006. In 2006, China was Malaysia’s fourth largest trading partner, up from the tenth largest in 1996.6 95


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Malaysia has been the main ASEAN trading partner for China for many years. The bilateral trade volume in 2002 reached US$14.27 billion, up 51.4 per cent from the previous year, of which China’s exports registered US$4.975 billion and its imports US$9.296 billion, which means up 54.4 per cent and 49.8 per cent respectively. As the result, Malaysia became the biggest ASEAN trading partner for China for the first time.7 From January to October 2003, the same game happened. According to official statistics, in the first season of 2008, the bilateral trade between China and Malaysia reached US$121.48, up to 24 per cent over the same period of last year, thus accounting for 22 per cent of the total trade volume among China and 10 ASEAN countries. And then, Malaysia is still the largest trade partner of China among the 10 ASEAN countries.8 Table 5.1 Trade between China and Malaysia (Unit: US$ billion) Imports and China’s Exports China’s Imports Trade Exports to Malaysia from Malaysia Balance Time for Value Increase % Value Increase % Value Increase % China 2008 (1-7)

31.079

27.6

12.017

30.2

19.063

26.0

-7.046

2007

46.398

25.0

17.69

30.7

28.707

21.8

-11.017

2006

37.112

20.87

13.537

27.63

23.575

17.31

-10.038

2005

30.703

16.9

10.607

31.2

20.096

10.6

-9.489

2004

26.261

30.5

8.087

31.7

18.174

29.9

-10.088

2003 (1-10)

16.182

42.3

4.898

22.1

11.288

53.3

2002

14.271

51.4

49.75

54.4

92.96

49.8

1996

-4.321

3.79

Source: Ministry of Commerce of the People’s Republic of China.

China’s major imports from Malaysia are: electrical and electronics; palm oil; chemicals and chemical products; crude rubber; optical and scientific equipment. China’s major exports to Malaysia are: electrical and electronics; machinery, appliances and parts; chemicals and chemical products; manufactures of metal; and iron and steel.


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Table 5.2 Trade between China and ASEAN (Unit: US$ billion)

1st half of 2008

2007

2006

2005

2004

1990

Total

115.8

202.5

160.84

130.37

105.88

8

Increase (%)

+25.8

+25.9

+23.7

+23.1

Balance for China

-14.23

-18.2

-19.68

Source: Ministry of Commerce of the People’s Republic of China. Figure 5.1 China’s Trade with ASEAN and Malaysia (US$ billion) 250 200

China with ASEAN

150

China with Malaysia

100 50 0

2007

2006

2005

2004

Guangdong’s Trade with Malaysia and ASEAN For many years, Guangdong has been the most critical trading partner for Malaysia in China. In the middle of 2007, Malaysia’s trade with Guangdong exceeded that of Singapore. As the result, Malaysia became the No. 1 trade partner for Guangdong in ASEAN. Recently, new hope for trade between Malaysia and Guangdong appeared, when Mr Wang Yang, Party Secretary of the Communist Party of China, Guangdong Committee, visited Malaysia. Total trade between them is expected to reach US$29.0 billion in 2010.


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Table 5.3 Guangdong’s Trade with Malaysia and ASEAN (Unit: US$ billion)

2008 (1-3)

Malaysia 6.67 ASEAN

2007

2006

2003

2010

14.48 55.96

11.3 44.2

0.77 19.92

29.00 (Expected)

Source: http://www.gddoftec.gov.cn/ and http://news.stock888.net/040601/101,1 317,839561,00.shtml Figure 5.2 Guangdong’s Trade with Malaysia and ASEAN (US$ billion)

60 50 GD’s Trade with Malaysia GD’s trade with ASEAN

40 30 20 10 0

2007

2006

2003

ASEAN is now Guangdong’s fifth trading partner. ASEAN’s share of Guangdong’s total global trade is 8.4 per cent in 2006. ASEAN is now Guangdong’s fifth export market and third import source. Malaysian Investment As a vital part of economic cooperation, investment with each other should be examined in the same way as above. However, it is not easy to do because of the lack of information. By the end of 2007, Malaysian total investment in China reached 4.681 billion US$, including 4,232 projects.


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Figure 5.3 China’s and Guangdong’s Trade with Malaysia (US$ billion) 50 40

China’s trade with Malaysia GD’s trade with Malaysia

30 20 10 0

2007

2006

Malaysian companies have invested a total of US$4.2 billion in China. These investments are mainly in: oil and gas; infrastructure development; construction; pharmaceuticals; moulds and dies; metals; food; textiles; wood; real estate; electrical and electronic products; and hotels. In 2006, Malaysia was ranked as China’s second largest investor among ASEAN countries with realized investments of US$393 million. Malaysia is also the recipient of growing investments from China. By the end of 2006, Chinese companies had invested US$952.6 million in Malaysia, mainly in the sectors of: paper, printing and publishing; basic metal products; electrical and electronics; wood and wood products; and transport equipment. Malaysian Investment in Guangdong There are more than 500 Malaysian companies in China’s Guangdong Province with realized investment of US$0.49 billion. According to the consulate-general of Malaysia in Guangzhou, who met a reporter in 2004 when the 30th anniversary for the establishment of formal relations between China and Malaysia came, Perfect (China), which was invested in by Malaysians in Zhongshan city of Guangdong province in 1994, is one of models for Malaysian companies in China.9 It is a tough task getting to know how many of Guangdong’s companies have invested in Malaysia. To conclude, as to the trade balance, trade deficit is usually shared by China, at a high increasing rate. China receives more investment from ASEAN including Malaysia than that from China to ASEAN and Malaysia.


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Guangdong’s share of China’s total trade with Malaysia is about one third, while Guangdong’s share of China’s trade with ASEAN is also about one third. The same amount reveals the leading role of Guangdong in China’s foreign trade. High-level Exchanges There are many visits made by senior officers from Malaysia to Guangdong. At the same time, two top officers of Guangdong visited Malaysia in 2007 and 2008 respectively. Not only do high-level exchanges of both governments display the worth for each other, but they also push for economic cooperation. On May 30, 2007, the Malaysian Minister of International Trade and Industry Datuk Seri Rafidah Aziz and her party visited Guangdong. Executive Vice-Governor of Guangdong, Tang Bingquan, met with them. Malaysian Foreign Minister Datuk Seri Syed Hamid Albar and his party visited Guangdong on July 9, 2007. In August 2007, Malacca State Governor Tun Datuk Seri Utama Mohd. Khalil bin Yaakob and his delegation visited Guangdong. As the Governor of GD, Mr Huang Huahua said when he met with them: “The Governor’s visit marks the third high-ranking delegation in the last three months after International Trade and Industry Minister Datuk Seri Rafidah Aziz’s and Foreign Minister Datuk Seri Syed Hamid Albar’s Guangdong tour last May and July respectively.” It fully demonstrates that Malaysia attaches great importance to the friendly cooperative relations with Guangdong, Huang also said, adding Guangdong also highly values mutual exchange and cooperation with Malaysia.10 In 2007, Mr Huang Huahua, the governor of Guangdong, visited Malaysia, and in 2008, Mr Wang Yang, Party Secretary of the Communist Party of China, Guangdong Committee, visited Malaysia again. It is not usual for two top officers from Guangdong to visit the same country in two years. Thus, their visits fully demonstrate the significance of Malaysia for Guangdong, which attaches great importance to friendly cooperative relations with Malaysia. With the visits of senior officers from both governments, much special work was done for enhancing economic cooperation. In May 2007, the “2007 Seminar on Malaysia-China Business” was hosted in Guangzhou, the capital of Guangdong, to further enhance cooperation in fields such as electronic industry, multimedia industry and electronic auto parts.


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The seminar was co-hosted by the Malaysian International Trade and Industry Ministry, Malaysian Foreign Trade Promotion Centre, Malaysian Industrial Development Authority, the Department of Foreign Trade and Economic Cooperation of Guangdong Province, and China Council for the Promotion of International Trade Guangdong Sub-Council (Guangdong Chamber of International Commerce). It attracted the participation of more than 500 Chinese and Malaysian entrepreneurs.11 In September 2007, the “2007 Guangdong Malaysia Trade Fair” was staged in Kuala Lumpur, Malaysia. Therefore, it could be said that 2007 and 2008 are landmarks for economic cooperation between Malaysia and Guangdong in China. What Promotes Economic Cooperation There are four reasons that contribute to the economic cooperation between Malaysia and Guangdong of China. Firstly, Sino-Malaysian relations work better than before. As a part of China, Guangdong could not cooperate with Malaysia without the good SinoMalaysian relations. On May 31, 1974, China and Malaysia officially established diplomatic relations. Since then, they have witnessed sound development in the political, economic and cultural fields. Since 1985, the Malaysian Government has made gradual readjustments of its policy toward China. Contacts at different levels have been continuously increasing between the two countries. Since the 1990s, as Sino-Malaysian relations have reached a new stage for development, friendly contacts and cooperation have developed in various fields.12 Secondly, the achievements of both countries in economy do good to the cooperation. According to Yang Jiechi, Foreign Minister of China, who made the speech at the Luncheon Marking the Inauguration of the Kissinger Institute on China and the United States at the Wilson Center, over the past 30 years, historic changes have taken place in the relations between China and the world. China is now more closely linked with the rest of the world. In 1978, China accounted for less than 1 per cent of global trade, while in 2007, the figure jumped to about 8 per cent, with an average annual import growth of 16.7 per cent. China has grown into the third largest import market in the world and the largest in Asia.13 The economy of Malaysia is getting better and better with the help of great efforts from Malaysians. The performance of the Malaysian economy makes


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Malaysia one of the most critical trading partners around the world, of which China’s share increases smoothly. Thirdly, the economy of Guangdong is one of the most advanced in China. Its foreign trade plays the leading role in that of China. As a result, Guangdong is Malaysia’s most import province in China in terms of economic and trade cooperation. Lastly, the special relationship between Malaysia and Guangdong, China, advances their cooperation. The distance between them is so short that Guangzhou is only three hours by flight from Kuala Lumpur. Furthermore, ancestors of many Chinese in Malaysia emigrated from Guangdong many years ago. Many Malaysian companies in Guangdong are invested in and managed by Chinese from Malaysia. Prospect When Mr Abdullah Badawi, Prime Minister of Malaysia, met with Mr Wang Yang, Chinese Communist Party secretary of Guangdong in China, in Kuala Lumpur last month, several proposals were put forward to increase economic interaction between Malaysia and Guangdong of China. Trade between Malaysia and Guangdong is expected to reach US$29 billion in 2010. Based on the speed of increase in trade, it would not be a difficult task. And more investment from Guangdong would arrive in Malaysia. Furthermore, it is anticipated that a momentum of high-level exchanges between Malaysia and Guangdong would be maintained. Notes 1. “Sino-Malaysia Relations and Malaysia’s Foreign Policy Perspectives”, Contemporary Asia-Pacific Studies, No. 9, 2003 (达图•阿布杜勒•马吉德,“中马关系与马来西亚的对外政策”,《当代亚太》2003年第9期); Liao Xiaojian, “China-Malaysia Relations in Post-Mahathir Era”, Contemporary Asia-Pacific Studies, No. 1, 2003 (廖小健：“后马哈蒂尔时代中马关系展望”,《当代亚太》2003年第1期); Liao XiaoJian, “China-Malaysia Relations: Interaction and Win-win after the Cold War”, Contemporary Asia-Pacific Studies, No. 4, 2005 (廖小健, “冷战后中马关系互动与双赢”,《当代亚太》2005年第4期); Gu Changyong, “China’s Changing Political Economy with Malaysia: A Regional Perspective”, Southeast Asian Affairs, 2006 No. 2 (“从区域的观点看中国与马来西亚政治经济关系的变化”,《南洋问题研究》2006年第2期). 2. Chen Shuanghua, “A Study on Malaysia’s Strategy for External Trade”, Academic Exploration, No. 1, 2001 (陈霜花, “马来西亚对外贸易战略问题研究”,《学术探索》2001年第1期); Zhao Hong, “China’s Accession to the WTO


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and the Economic and Trade Relations between China and Malaysia”, Southeast Asian Affairs, No. 1, 2002 (赵洪, “中国入世与中马经贸关系”,《南洋问题研究》2002年第1期); Zhao Hong, “Studying the New Development Trend of China- Malaysia’ Economy and Trade Relationship”, Asia-Pacific Economic Review, No. 5, 2004 (赵洪：“中马经贸关系新发展”,《亚太经济》2004年第 5期); Ding Jie and Wei Hao, “Sino-Malaysia Relationship of Economy and Trade — Actuality, Questions and Countermeasures”, International Trade Issues, No. 5, 2005 (丁杰、魏浩，“我国与马来西亚经贸关系的现状、问题与对策”,《国际贸易问题》2005年第5期); Li Hongjie, “The Development of Sino-Malaysia Economic and Trade Relations and the Role of Overseas Chinese Businessmen”, Asia-Pacific Economic Review, No. 4, 2007 (李鸿阶，“中马经贸关系发展与华商作用研究”,《亚太经济》2007年第4期); Liu Yun, “Voice from China and Malaysia: Require More Cooperation”, China’s Foreign Trade, No. 24, 2004; Liu Yun, “Made-in-China Brands Favor Malaysia”, China’s Foreign Trade, No. 24, 2004. 3. http://english.mofcom.gov.cn/ 4. http://www.matrade.gov.my/foreignbuyer/Msiatradeinfo.htm 5. http://www.gddoftec.gov.cn/en/Statistical/index.html 6. Seminar on “Malaysia-China Business Opportunities”, Guangzhou, China (Wednesday, 30 May 2007). 2008-9-1. 7. http://www.fmprc.gov.cn/eng/wjb/zzjg/yzs/gjlb/2732/default.htm, 2008-9-12, 2:04. 8. “Malaysia Tops Trade Amount with China among 10 ASEAN Countries in the First Season”. 2008-9-12, 2:06. 9. http://www.perfect99.com/ 10. “Huang Huahua Meets Malacca Governor”. 2008-9-13, 9:03. 11. Seminar on “Malaysia-China Business Opportunities”, Guangzhou, China (Wednesday, 30 May 2007). 2008-8-25, 13:11. 12. http://www.fmprc.gov.cn/eng/wjb/zzjg/yzs/gjlb/2732/default.htm, 2008-9-12, 1:03. 13. “China-US Relations in the New Century”, speech by Foreign Minister Yang Jiechi at the Luncheon Marking the Inauguration of the Kissinger Institute on China and the United States at the Wilson Center. 2008-8-27, 20:11.


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104 ♦ Zhang Desheng, Fu Guohua and Liu Zhiyong

Chapter 6 Hainan, Yunnan and Guangdong State Farms’ Natural Rubber “Going Global” Strategy and Cooperation with ASEAN Countries Zhang Desheng, Fu Guohua and Liu Zhiyong

Introduction In 2001, China’s rubber consumption surpassed US and it became the biggest country consuming and importing rubber in the world. At present, its selfsufficiency rate of natural rubber is less than 1/3. With the background of strong domestic demand for natural rubber, increasing import and relative lack of domestic resources, some experts appealed for protecting the safety of the natural rubber industry and speeding up the establishment of overseas natural rubber production bases. Hainan, Yunnan and Guangdong State Farms have been developed as China’s three major natural rubber superiority plant regions and production bases which have supplied the majority of natural rubber since their foundation, approximately accounting for 58.37 per cent of the national production in 20071. Under the national initiative and the profession impetus, the three state farms planned and implemented the “Going Global” strategy actively from 2002. The production and export market of world natural rubber is in ASEAN, which accounts for more than 90 per cent of the natural rubber imports of China. Hainan, Yunnan and Guangdong State Farms pay close attention to Southeast Asia, and develop a substantive cooperation with ASEAN countries in order to expand the natural rubber planting and processing to those countries. Obviously, “Going Global” means to set up the oversea natural rubber base through developing natural rubber planting, processing industry and trade rather than exporting the rubber. In ASEAN, the three old members Thailand, Indonesia and Malaysia are the main natural rubber countries whose rubber industry is competitive. Their output accounts for about 65 per cent of the world in 2007. The new ASEAN member countries, such as Vietnam, Myanmar and Laos, are speeding up rubber industry 104


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Hainan, Yunnan and Guangdong State Farms’ Strategy and Cooperation with ASEAN ♦ 105

development. China’s natural rubber industry has its own advantages. With the acceleration of the process of China-ASEAN regional integration, all traders and professions in China are seeking cooperation with ASEAN to acquire benefits. The author believes that the “Going Global” strategy of three state farms has a specific mission. Good expectation depends on the farms effort, government support, and cooperation with ASEAN countries. The last has uncertainty. So, this paper attempts to analyze the concrete practice of the natural rubber “Going Global” strategy of three state farms, study some issues on the positive factors, mode selection and constraint factors of ASEAN’s cooperation. It is anticipated to have a clear understanding and helpful thinking. Practice of Natural Rubber “Going Global” Strategy Background and Process In 1998, the Central Committee of CPC recommended studying and implementing the “Going Global” strategy in order to explore the international market and utilize foreign resources; 4 years later, the 16th CPC National Congress pointed out that the implementation of the “Going Global” strategy was a momentous decision in the new stage of opening-up. China encourages and supports various forms of ownership enterprises that have comparative advantages to invest abroad. In order to carry out the Party’s decision, all districts and departments began to implement the “Going Global” strategy. In the same year, the Ministry of Agriculture formed a plan of “Going Global” for China State Farms. Three major natural rubber state farms, Hainan, Yunnan and Guangdong, went about work positively. The process can be divided into two phases. First phase, from 2002 to 2005, is the period of the 10th “Five-Year Plan” in China, the time when overseas natural rubber bases turned into the action from the argumentation. Three state farms started to plan the “Going Global” strategy and launched the forum to research. For example, on March 5, 2004, Yunnan State Farms held a rap session to discuss the strategy. From May 30 to June 1, 2005, the Ministry of Agriculture and Department of Foreign Economic Cooperation of Ministry of Commerce jointly organized a seminar to discuss such a strategy of China State Farms. Hainan, Yunnan, Guangdong State Farms introduced their experience; turning ideas into action, the state farms organized cadres to survey abroad and experts to demonstrate, seeking for cooperation. They achieved substantive results which can be seen as arriving at an agreement of cooperation intention, renting land for plantation,


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purchasing processing plants; the “Going Global” strategy was written into the 11th “Five-Year Plan” of each state farms. Like Hainan, the strategy became one of three major strategies – it planned to plant overseas natural rubber 200,000 mu (Chinese acre), purchase and process 200,000 tons of rubber till 2010. Yunnan State Farms planned to plant overseas natural rubber 2,000,000 mu and produces 200,000 tons2, while Guangdong State Farms planned to develop overseas natural rubber base about 500,000 mu and strive for 500,000 tons output at the end of the 11th “Five-Year Plan”3. There was an important landmark this period – the foundation of the natural rubber industry group, which was a suitable carrier to carry out the “Going Global” strategy. Among these, Yunnan State Farms set up Yunnan Natural Rubber Industrial Co., Ltd. in July 2004, Hainan State Farms set up Hainan Natural Rubber Industry Group Co., Ltd. in March 2005, and Guangdong State Farms set up Guangdong Province Guangdong State Farms Rubber Group Co., Ltd. in June 2005 after they received administrative reply from Farm Bureau. In the second phase – from 2006 till now – the state farms carried out the strategy constructively according to the 11th “Five-Year Plan”. The year 2006 was determined by the Hainan State Farms as the first important year for “Going Global”. In the same year, August 24-25, the National State Farms’ “Going Global” strategy seminar was held. Guangdong, Hainan State Farms reported their implementation and experiences. In November 14-15, 2007, the China Natural Rubber Association was founded, which was a symbol of market-orientation and internationalization of China’s natural rubber industry. During this period, due to the expansion of China’s natural rubber consumption and the increase in import, the appeal to protect domestic natural rubber industry safety and establish overseas natural rubber production base was intensive. Each state farms carries on businesses which are rubber processing, land renting and purchasing for natural rubber plantation, rubber trade in Southeast Asia countries. Yunnan and Guangdong have much more substantive performance. On September 13, 2008, Guangdong State Farms and Malaysia Sabah signed the contract of 180,000 mu natural rubber plantation cooperation project; the total investment is 80,000,000 U.S. dollars and 50 per cent each. It will start planting at the end of the year, and they will also build rubber processing plants before putting into production.4 Besides, Sinochem International (Holdings) Co., Ltd., several farms and private enterprises in Yunnan Xishuangbanna and other places, as well as some tire companies in Shandong are also investing in natural rubber plantation or rubber processing abroad.


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Comparison of Natural Rubber “Going Global” Strategy Practice of Three State Farms The practice of the natural rubber “Going Global” strategy of three state farms has a lot in common together with differences. Similarities are as follows: as state-owned enterprises which has undertaken the mission to develop the natural rubber industry and secure the natural rubber supply, the strategy which was promoted by the government and industry reflected the will of the state; the “Going Global” strategy became the state farms (group) development strategy; the target investment countries were basically the same – the Southeast Asian countries and some African countries which are suitable for natural rubber cultivation; investment businesses were similar which mainly were rubber processing, natural rubber plantation through land renting and the other. The main differences are: Differences of work. The “Going Global” strategy was largely impelled by the government and formed at the end of 2002. The state farms invested overseas consciously former and had foreign agriculture aid experience. Under the new situation, Guangdong State Farms is the pioneer in large-scale overseas investment. In 2002, using the business and service platform of Guangdong, it cooperated with partners to set up an international rubber trade company which engaged in overseas imports of rubber products; in 2003, it started preparation for overseas rubber development; in 2004, it started to engage in large-scale rubber development in Southeast Asia, established the industry, acquiring 5 rubber processing plants in Thailand and Vietnam, buying a latex products factory in Malaysia, operating 100,000 mu natural rubber plantation in the state of Sarawak, Malaysia. Yunnan State Farms has also made outstanding achievements in the cooperation of natural rubber development by using their border advantages. Especially, by using alternation of poppy cultivation and foreign aid projects, it can gain the support of policy, capital, technology and equipment from the drug-suppression institution of UN and related organizations in China. When helping and driving the border planting in support of the local rubber industry, it achieves “Going Global” goal at the same time. In addition, the farms (branch) of Yunnan State Farms and employees are involved in overseas natural rubber cultivation. Some workers of the farm (branch) shares stocks to participate in natural rubber cultivations in Myanmar and Laos. This is the biggest difference between Yunnan State Farms and the other two on the strategy. The schedule of Hainan State Farms is a bit slower. However, in early 2004, it contacted some companies in Malaysia and reached an agreement of lease for rubber cultivation, and, according to China Economic Weekly, till the end of 2005, it


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has invested 1,000,000 mu in Cambodia, 900,000 mu in Malaysia for rubber cultivation, and has set up factories in Thailand, Indonesia, Vietnam and other countries for rubber processing5. Differences of countries and regions invested in. ASEAN countries are the first choice. Hainan State Farms chose Malaysia and Cambodia as its main objectives; others were Thailand, Myanmar, and Vietnam. Guangdong State Farms chose Malaysia, Thailand and Vietnam under the principle of “First major rubber production country, then the secondary rubber production country”. The selected areas not only have rich resources in rubber cultivation, but also are the relative concentrations of overseas Chinese. Yunnan’s largest potential advantage is the border and the best condition is the Greater Mekong Sub-region cooperation, moreover, the economic development level of neighbouring country is low. Therefore, it cooperated with neighbouring countries in priority; it focused on Vietnam, Laos, Myanmar, Cambodia, Thailand, especially the northern part of Laos, North-East Province (state) in Myanmar. It also tried to cooperate with Malaysia and other countries. Differences of the business. Mainly three types: cultivation, processing and trade, the main difference in the focus or priorities. The main businesses of Hainan State Farms are natural rubber cultivation, acquisition and processing. It includes renting a large-scale land for rubber planting, establishing initial rubber processing factory and overseas rubber trading company in Malaysia and Cambodia, seeking a new cooperation with Indonesia and other countries as well as Africa to establish an overseas rubber production base. The aim is to carry out rubber trade business, extend e-commerce to Thailand and Vietnam, and strive to build “world rubber sales centre” and the electronic trading market. Yunnan State Farms develops overseas rubber plantation and processing positively. It plants rubber through renting, purchasing and contracting barren hill, builds up rubber production factory, carries out sales and trade, builds the nursery base, demonstration rubber plantation and technical training centres to strengthen local demonstration and service. Its feature is to develop offshore natural rubber resources in cooperating with local villagers and government, and as the way of project to enrich farmers and develop regional economy. Guangdong State Farms is engaged in overseas imports of rubber products and market expanding through co-operating with partners; strengthen communication and wearing in cooperation, then in cooperation of rubber processing and rubber producing, finally in plantation. Now focus on the plantation and processing. The natural rubber “Going Global” strategy of three state farms is the enterprise innovation behaviour under the state’s will. Besides their own endeavours, it involves a series of factors and the key is cooperation. The


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essay tries to summarize the practice of the strategy, but it can only make a general description as a result of the limited data. The purpose of comparing the similarities and differences is to provide reference for probing the cooperation with the ASEAN countries. Reason for the Natural Rubber “Going Global” Strategy The “Going Global” strategy reflects the will of Chinese government, which scholars gave different connotations, such as international trade and foreign investment, or the output of products, technology and capital. Many are inclined to believe that the key problem of “Going Global” is foreign direct investment (FDI). The related theory of FDI, whether Transaction Cost of Rugman A.M, Monopoly Superiority of Hymer, the Product Life Cycle Model of Vernon, or the Expansion of Trade and Business Conduct Space Model of Watts that study the trade expansion and business conduct spatial change, or the International Production Compromised Model of Duning J.H and the Marginal Industry Theory of Kiyoshi Kojima, basically research the developed country, analyze the motivation and conditions of foreign investment of multinational corporations. These theories mainly focus on the enterprise (multinational corporations) themselves to provide a reasonable and sufficient theory support for “Going Global” from the microscopic angle, or analyze the realization of the strategy from the macroscopic angle. The trade expansion urges the enterprise to change spatial behaviour is a reasonable explanation (Zhong, 2001). Hainan, Yunnan and Guangdong State Farms have set up the rubber industry groups. They are the leading force of natural rubber planting in China. Do they meet the theory? From the view collected, the main consideration of natural rubber “Going Global” is that increasing natural rubber cultivation area and output in China is difficult and to only depend on the traditional trade channel is unstable. Participating in foreign natural rubber resources development and industrial construction in order to build long-term and stable supply of natural rubber and obtain nature rubber resources directly through foreign investment to meet the domestic economy development is a means of solving the contradiction of supply and demand; to meet the needs of growth and development space of rubber group in the future, in particular in the domestic resource constraints and the background of economic globalization; to upgrade natural rubber core competitiveness in China; to promote cooperation and exchange between China and foreign countries (Lv, 2008). The “Going Global” strategy of three state farms is not only to satisfy their own development, but also to carry out a specific duty and mission: to ensure the natural rubber from abroad accords with China’s needs. So, the reasons for the “Going Global” strategy include national


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and enterprise angles. From natural rubber as a cash crop and businesses to obtain economic benefits as the objective, it is independent acts of enterprises. From natural rubber as China’s strategic resources and important imported energy, it contains the meaning of the state will. However, natural rubber as energy, under meeting the national interest, “Going Global” should be the autonomy of enterprise behaviour, to operate in accordance with rule with the national support. “Going Global” strategy is essentially corporate behaviour. Concerns Regarding Cooperation with ASEAN Countries Positive Factors of Cooperation (1) The regional economic integration and state’s will of cooperation The construction of China-ASEAN FTA and the Lancang-Mekong River sub-regional cooperation have been accelerated. In the regional economic integration process, all of the governments have a good will to cooperate. Cooperation in different industries, fields and multi-layers are supported to promote the coherence of national strategic interests. The friendly cooperation agreement signed between China and ASEAN countries created a well environment. A series of substantive measures facilitates the cooperation between the two sides in a wider scope, greater fields and more space. Among the 5 key fields of cooperation between China and ASEAN, agriculture is highlighted as a key item. China and ASEAN countries can share benefits from the common development of natural rubber resources in ASEAN through cooperation in natural rubber plantation, processing and trade. (2) The availability of resources Southeast Asia countries locate in the tropical area, where the climate is suitable for natural rubber cultivation and land resources are rich, which offer favourable natural conditions to plant natural rubber. Many abandoned, lowyield rubber plantations in Thailand, Indonesia and Malaysia need renovating and re-planting. Vietnam, Laos, Myanmar and other countries have so many wastelands which are suitable for planting natural rubber that the potential is great. As the top 4th big shortage in industrial raw materials, the potential of natural rubber processing is great too. (3) Enterprise efforts The increasing demand for rubber and rapid market development promote its favourable market potential and profit space. Enterprise is the main body


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to invest, so the “Going Global” strategy is independent spatial behaviour itself. After 50 years of development, the three state farms have accumulated abundant experiences of production and management and possess the ability of multinational operation, and it can provide plan, technology and capital supports for the offshore natural rubber industry development. Facing the changing situation, the “Going Global” strategy was put forward so as to exploit new development chances. It is hoped that it would have its international voice heard in the natural rubber field and make greater contributions to natural rubber development in the world by speeding up the internationalization process. (4) The possibility of “the coupling of comparative advantage” The idea of “the coupling of comparative advantage” argues that the premise of FDI of enterprises is that both sides have their own comparative advantages. Its motive is not to seek the return of a monopoly advantage, but to participate deeply in the international division of labour so that both sides can be complementary and reciprocal from comparative advantages. The condition is that both sides have their respective advantages, such as resource endowments. The point is to couple the comparative advantages into new integration advantages (Luo et al., 2001). The three state farms have formed a relatively integrated industrial system judged from the scale, management, production and technology. The rubber cultivation, rubber wood use and tapping technology have reached world level. Moreover, its resource allocating capacity is great and systematization level is high. Thailand, Indonesia and Malaysia, as the world’s main producers of natural rubber, have advantages in rubber cultivation and production, and those emerging countries of developing rubber industry, like Vietnam, is rich in land resources which are suitable for natural rubber planting. ASEAN countries have a good relation with China, and the short transport distance and convenient transportation is favourable for being sent back to China after rubber processing. The integration of advantages may be embodied in production increase, processing deepening and market expanding. Main Constraint Factors of Cooperation (1) The support of cooperative countries The main support from the cooperative countries embodies in the policy, ecology and local residents. From the angle of policy, Southeast Asia governments have a relatively positive attitude in attracting investment, and


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encourage cooperation seen from investment policy, industrial policy, fiscal and tax revenue policy, in particular the differences of policy would have an effect on the foundation of new plants and their profits. There are such problems as external cooperation policy instability, lack of specific investment conditions and strict foreign exchange controls. From the angle of ecology, the co-ordination between land development and protection is mainly considered, which means that environmental protection and agricultural biodiversity must be considered. From the angle of local residents, the main consideration is economic development and poverty reduction for the better welfare, another point is the social environment of race and religion. It would be good to play geographical advantages of local shareholders to establish good community relations. The objective selection includes both powerful countries and emerging countries of rubber industry, and the latter have more development potential. The regions chosen include places where rubber resources are superior or where many overseas Chinese gather. Yunnan State Farms chiefly choose places north of Myanmar and Laos. The point is a new coupling advantage can be integrated. (2) The risk of environment change There are political, economic and natural risks of foreign investment. Political risk is loss of economic benefits caused by primarily political, social, military and unexpected events particular in a nation; the political stability and policy continuity are mainly taken into account. In some ASEAN countries, unstable political situation is a big political risk. The policy continuity, government bureaucracy and corruption all can cause losses. The economic risk is mainly the market change, and possible serious economic risks brought about by the political risk. Mainly, it comprises the commercial pressure of competition, price risks under product sales globalization, risk of cross-border transactions and foreign exchange. The natural risk comes by variation of nature. Natural rubber, as a long-term crop, has a long time for investment and operation. ASEAN, although suffering from relatively few natural disasters, the rain and pests and such items as the uncertainty of risk also must be prevented. (3) The constraints of investors The factors needed in overseas investment include the abundant capital, export technology, multi-disciplinary talent and capacity. The keys are capital and capacity. The three state farms can be regarded as China’s large-scale agricultural industry groups, but they are lack of capital because of so many businesses. Without capital, it will be hard to invest overseas. From the point


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of view of capacity, four special capacities are essential if the enterprises want to expand overseas: the ability to learn foreign markets, manage foreign employees, integrate resources in the foreign market and run foreign affiliates (Gao et al., 2006). But those state farms have few international management expertises and have limited capacity in management experience of overseas plantation and processing plants. Professional personnel who are well learnt in international practice, strong operation ability and adaptive to the different cultural backgrounds are lacking. What’s more, the state farms are speeding up internal management system reform, such as Hainan State Farms which was decentralized to Hainan province this year carried out a long-term contract with tappers. It has so many internal affairs to deal with and heavy burdens that would reduce the efforts of foreign investment. In addition, each of the three state farms act separately, the collaboration and communication among them is not enough. (4) The labour service export Here natural rubber tappers, technicians and management personnel are discussed. Tapping is a labour-intensive production activity where labour intension is heavy and working hours are long. A shortage and loss of tappers would come out with the development of society and economy and rising living standards. Some countries, such as Malaysia, is short of tappers. Due to the strict importing of foreign workers and the high cost of labour exporting, it’s difficult to export tappers. But for countries such as Laos, the output of technicians are needed because more tappers need training. Exporting a certain number of tappers and technicians is also needed by other countries. What is more important is the export of management personnel that are required to be good at rubber planting, management and foreign languages, familiar with international rules and situation where invested. Due to the work environment, the wages and the original stock of manpower, the local labour market is not opening up to China; labour service export becomes a problem. Localization project management, employment of local tappers, technicians and managers involved in the cross-cultural communication barriers are all problems. Mode Selection to Cooperate (1) The ownership design and investment mode selection The “Going Global” strategy is essentially the issue that foreign enterprises involvement of the ownership or the specific form access to overseas market. The pattern of ownership of overseas businesses has a set of design which


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needs to be clear, which comprises: take the form of authorized production and chain operation, no investment on the ownership; set up joint ventures in a foreign market and have a certain degree of intervention in the ownership; exclusive investment, share 100 per cent ownership of the new enterprise. This decision-making is significant and strategic (Gao et al., 2006). Then choose suitable investment mode. First issue is whether to take the way of merger, purchases or create when to construct foreign investment projects. The selections of creation are exclusive investment, joint investment or jointly operation etc. Second is to choose the method of capital subscription, in cash, in kind or intangible assets. For example, Guangdong State Farms and local enterprises build the processing plants in joint venture. Generally, the ratio of the former is 55 per cent and the latter 45 per cent. They share out bonus at the end of year. A period of time later, Guangdong State Farms would purchase shares and the plant becomes exclusive investment. To plantation renting, it would take the form of signing contracts, specifying the leasing year and investment amortized. The fellow offers lands and policy while the state farms offers technology and management personnel. It is clear that the investment is focused on controlling the enterprise operation management and the purpose is to obtain benefits. (2) Investment business options Investment business is nothing more than the plantation, processing and trade. It is proposed to construct the overseas processing trade projects. Taking domestic equipments, technologies and capitals abroad to hold a joint venture, or build a new rubber processing plant to process standard or compound rubber that directly sell back to China’s domestic markets, or to process foreign rubber and supply rubber products. Another processing operation is to use the rubber wood to produce wood products and furniture. To cooperate with those countries which have appropriate lands for natural rubber cultivation, such as to contract or lease the plantations, rent lands, or even buy lands and plantations to develop the large-scale natural rubber plantations in order to establish the overseas natural rubber production base. The construction of new plantations in “Golden Triangle” area can be combined with alternation of poppy cultivation (Lin, 2005). To construct seedbreeding base (nursery) and set up the demonstration bases and the training and technical service centres, which has great significance in countries such as Myanmar and Laos. To set up overseas trade company for trade or imports and exports, building up market. The three businesses are different but connected, so the state farms can choose applicable business according to the reality.


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Conclusions The natural rubber “Going Global” strategy aims at the establishment of overseas natural rubber production base to ensure stable, adequate rubber supply for China. ASEAN countries which plant natural rubber are their first selection to develop overseas rubber industry. Since 2002, the three state farms have made substantive progress in renting lands for planting and setting up processing plants in ASEAN preliminary built up the overseas natural rubber production base. “Going Global” is a practical rather than theoretical issue. The article analyzed the practice on the three state farms “Going Global” strategy, and studied positive factors, constraints factors, and mode selection of cooperation. Clearly, “Going Global” strategy as the behaviour of enterprises has constrains, not only the innovation is needed, but also the support of the country, especially in the macro-management and industrial policies to guide and support for better conditions. “Going Global” is practical rather than to say theoretical. It is informed that the progress of three state farms “Going Global” is far from the expectation which shows that constraint factors of cooperation are making into effect and the reality is complex. Natural rubber industry is resource-constrained, so it is reasonable to appeal “Going Global” strategy considering China’s large amount of rubber consumption and imports. But the standpoint should be placed on how to promote the development of domestic natural rubber plantation. Countermeasures may include internal reform of management system and operation mechanism, external adjustment of the tariffs, etc. Come to this study, if the rubber industry development of those countries can be compared, the rubber resources of country invested can be analyzed, overseas and domestic experiences on rubber resources utilization can be summarized based on the future economy tendency and China’s natural rubber rate of dependency and consumption demand, a clearer idea of cooperation may be obtained and an accurate viewpoint can be secured. Notes 1. According to the data of three state farms, by the end of 2007, the total natural rubber production of Hainan, Yunnan and Guangdong state farms was 171,000, 168,400 and 22,500 tons each, reaching 361,900 tons, accounting for 58.37 per cent of the total output of 620,000 tons. 2. Liu Wenguo, “Chinese Rubber “Going Global” Road Is Hard”, International Business Daily, 29th May 2006, edition A06. 3. Lin Gen, “Three Rubber Giant Overseas Enclosure of Land”, Securities Times, 23rd March 2006, edition 15.


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4. “Guangdong State Farms and Malaysia Sabah Signed the Contract of 180,000 Mu Natural Rubber Plantation Cooperation Project”. 5. Yang Mei and Zhang Meifang, “Hainan State Farms Prepare Professional Group for the Realization of Chinese Aircraft Carrier”, China’s Economic Weekly, 2006.27.

References Gao Wenzhi, Yu Jianxing and Ning Xiangdong (2006), “The Framework of ‘Going Global’ Strategy”, Enterprise Management, 2006 (2), pp. 91-94. Lin Youxing (2005), “A Survey and Cooperation Thought of Natural Rubber Industry in Sub-region of the Great Mekong River”, Tropical Agricultural Science & Technology, 2005 (1), pp. 16-22, 29. Luo Qingcheng, Tan Bo, Wei Jian et al. (2001), “State Farms’ ‘Going Global’ Strategy Based on ‘the Comparative Advantages of Coupling’”, International Trade Journal, 2001 (3), pp. 10-14. Lv Linhan (2008), “Practice and Experience of Natural Rubber ‘Going Global’ Strategy of Guangdong State Farms”, the First China Natural Rubber Industry Development Conference Papers, 2008.12, pp. 230-240. Zhong Guobiao (2001), “Expansion of Foreign Trade and Enterprises Spatial Behavior Change Rule – China Enterprises ‘Going Global’ Strategy”, Finance & Trade Economics, 2001 (11), pp. 49-53.


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Regional Integration and Environmental Protection ♦ 117

Chapter 7 Regional Integration and Environmental Protection: The Case of Beibu Gulf Huang Yaodong*

Introduction: Making Beibu (Tonkin) Gulf’s Mountain Green and Water Blue Forever With the development of economic globalization and regional economic integration, the exploitation and utilization of natural resource is on-going. The nature is moaning, and the environment is crying for help. The dying nature and polluted environment can no longer bear the weight. It is urgent to save nature and the environment. The Guangxi Beibu-Gulf economic zone is an important part of the world, especially the ocean and coastal area. Considering the lesson learnt from the pollution of China’s Bohai Bay, while opening and exploiting the natural resource of the Beibu-Gulf economic zone, the ocean’s maiden bay, the protection of nature and environment should be the most important issue to be considered. The so-called natural resource refers to the natural factors that relate to human social development and can be used to produce usual value and influence on the productivity of labour. It can be divided into tangible resources which include land, water, animal, plant, mineral, etc. and bodiless resources which include light, heat, etc. Natural resource is the material foundation of human survival and development as well as the spring of social material welfare. It is one of the most important basis for sustainable development, as it contains biological resource, agricultural resource, forest resource, national land resource, mining resource, marine resource, water resource and so on. With the proposal of the concept of Round Beibu Gulf and Pan-Beibu Gulf, as well as the permission from the Chinese State Department for the opening and exploitation of the Guangxi Beibu-Gulf Economic Zone, Beibu Gulf, which had been the starting port of Silk Road 2000 years ago and has been in silence for the past 1000 years, receives another spring of 117


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118 ♦ Huang Yaodong

opening and exploitation. However, when opening and exploiting, the South China Sea – which contains parts of Guangxi, Guangdong and Hainan of China as well as parts of Vietnam – meets an important problem, which requires the cooperation and coordination of all fields to deal with it, namely environmental protection. The contents of and reasons for of the problem, as well as how to settle the problem should be a project for the correlative governments in Beibu Gulf. It’s a Historic Demand and Good Opportunity to Open and Exploit Beibu Gulf With the rapid progress of the China-ASEAN Free Trade Area, the formal proposal of the China-ASEAN “One Pole Two Wings” statute, the implementation of the China-Vietnam “Two Corridors One Circle”, the great exploitation to the west, and the economic radiation of east and south of China, especially when the exploitation of the Guangxi Beibu Gulf economic zone has become a national developing strategy, Guangxi Beibu Gulf, the place that had been the starting point of marine Silk Road receives another exploiting spring. The Beibu-Gulf economic zone is located at the hinge of Chinese Southern Economic Zone, Southwest Economic Zone and ASEAN Economic Zone. It is the only coastal area in Chinese exploiting area, and also the area that borders with ASEAN nations both on land and sea. The strength of its position is obvious, and its strategic status is remarkable. The resources in Beibu-Gulf, which include land, ground, freshwater, ocean, agriculture, forest, tourism and so on is very rich with a large environmental capacity, good eco-system, high carrier for population, low exploiting density and great developing potentiality. It is an important region of the Chinese coastal area with new plan and structure for modern harbor groups, industrial groups and city groups of high quality. Since the Chinese reform and opening-up, especially since Chinese strategy of exploiting the west was implemented, the development of economy and society of Beibu-Gulf economic zone has gained great achievement and entered into the best developing period in history. The economic strength gets more remarkable, the rate of economy aggregate of Guangxi province grows increasingly, the building of infrastructure makes a significant progress, the throughput of coastal ports is over 500 million duns, the transporting situation has gradually been improved, the role of southwest sea corridor has been well played, special and competitive industries develop rapidly, a scale of large national projects has been built or will be built, the opening


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level is continuously improved, the economic cooperation with other civil areas is being deepened, and its stature in the cooperation with ASEAN gets increasingly remarkable, the living standard of people here has been increased, and the ecology establishment and environmental protection has been strengthened. The establishment of China-ASEAN Free Trade Area is rapidly improved, the establishment and implementation of a series of cooperative systems such as China-ASEAN expo, summit of China-ASEAN business and investment and GMS has deepened China-ASEAN cooperation, and laid the foundation for Beibu Gulf to play its role of cooperative frontier and bridge-tower toward ASEAN nations. China pays great attention to the development of Beibu-Gulf coastal area, taking clearly Beibu-Gulf economic area as the emphasis area of exploiting the west, opening and cooperating toward ASEAN, putting forward new demands, endowing with new missions. The opportunities of developing Beibu-Gulf economic zone is coming, as the developing situation gets ready and the time is mature. Accelerating the opening-up and exploitation of Beibu-Gulf relates not only with Guangxi’s self-development, but also the whole national development, so its strategic significance is remarkable. The opening-up and exploitation of Beibu-Gulf economic zone is propitious to accelerate wholly Guangxi’s economy and society, promote from a whole the developing level of national area and economy, consolidate the national unity and safeguard the frontier steady, carry out deeply the strategy of western exploitation, strengthen the function of southwest marine corridor, accelerate the opening to the outside world and economic development of southwest area, forming the strategic highland of bringing along and upstanding the western exploitation; perfect the economic overall arrangement of Chinese coastal and frontier area, make the development in middle, east and west area more harmonious, connect more tightly with each other and pour new strong power into the developing strategy of national economic society, and quicken the establishment of ChinaASEAN Free Trade Area, deepening the strategic companionship between China and ASEAN toward property and peace. Economic globalization and regional economic integration is developing rapidly. In Beibu Gulf, the western exploitation is being put forward, the building of pan-delta economic zone, CEPA and the establishment of ChinaASEAN Free Trade Area is being quickened, China-ASEAN expo’s being held in Nanning, Guangxi, forever, the development of GMS, the building of China-Vietnam “Two Corridors One Circle” and so on are Beibu-Gulf’s multi-opportunities. All above brings Beibu Gulf which is endowed by nature


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in location an unprecedented developing opportunity, building for it a good developing environment. The Beibu-Gulf Eco-system at Present “Lots of little waves gets together on the seasand, dolphins are playing with the flying sea-gulls, pearls are shining under the sun and moon, mangroves is growing around the bank….” This is the view before you when you come to Beibu Gulf. Beibu Gulf, which is famous for the clearest ports, is a place with a total area of 130,000 square kilometers. It lies in the northwest parts of China. The Guangxi Beibu-Gulf economic area is located in the central part of Beibu-Gulf economic circle. It is the most convenient marine corridor in southwest part of China and also the most important bridge and strategic hinge to accelerate the whole cooperation between China and ASEAN. There are rich resources in the region, including petroleum, natural gas, marine biology, minerals, energy resource and so on. Beibu Gulf is a clean marine region with blue sea, blue sky and clear air. According to the testing material, during the tenth five-year period, the Beibu-Gulf polluting resource and polluting material is being reduced 46 per cent annually, the sediment in all area here accords with the first class, the attainment rate of marine creature quality is 100 per cent. There is rich rain here, the rain and heat shares the same season, all of which fits the plants’ growth very well. Presently, there are 8,354 kinds of vascular plants, of which the special plants are Cathay silver fir, camellia chrysantha tuyama and so on. The number of known species of terrestrial vertebrates is 884 altogether. Beibu Gulf is one of the areas with more wildlife. The national rare animals that are specially protected are the white-headed monkey, lizard in Yao mountain and so on, of which the white-headed monkey is unique. It is an area with the most collective distribution of mangrove in the country. There is altogether 8,375 hectares of mangrove area here and it covers 38 per cent of total area of 22,639 hectares, arranges the second in the country. Beibu Gulf is a semi-enclosed bay at the northwest of the South Sea, the top (north) of which is the Guangxi Zhuang Autonomous Region, the east of which is the Zhanjiang city in Guangdong province and Hainan province, the west of which is Vietnam. By far, it is China’s cleanest blue bay, blue sea, blue sky. Clear air is Beibu-Gulf’s most valuable resource and grand. The Guangxi Beibu-Gulf economic zone owns a beautiful coastal viewsight, and thus is a rich tourist resource. There lies the capital city of Guangxi, Nanning, the one with the fame of Green City, Beihai Silver Seashore, the one with the fame of Chinese First Seashore as well as Qinzhou’s Sanniang


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Bay, Fangcheng City’s Jing interest place, Shangsi’s national wooden park, Miliion Mountains and so on. But the Beibu Gulf which has been in silence for long faces the challenges of environmental destruction when receiving the opportunities for economic growth. It has been forecasted that Beibu Gulf will confront the following calamities unless environmental problems are taken into consideration beforehand: • Pollution of acid rain. It is because people utilize more and more petroleum and chemicals. The main harm it causes is that a large stretch of woods will be dead. There are currently three areas suffering from acid rain: Europe, North America and the southern area of Chinese Yangtze River. • Greenhouse effect (or global warming). The reason why the globe gets warm is that countries produce more and more carbon dioxide, among which America is the first and China is the second. The main disasters it leads to is that the ice in both the southern and northern poles of the globe will melt, and then the sea plane will get higher. According to scientists’ calculations, if the carbon dioxide is not restricted, by the end of the century, the global atmosphere will increase by 2 to 5 centigrade. And the sea plane will increase 30 to 100 centimeters, and hence leads to a catastrophic result. • Land desert. The desert in the earth is eroding the land with a speed of 60 million hectares annually, namely a speed of 10 hectares per minute. This is because the vegetations of the plains are getting destroyed. In China, 500 hectares of land is swallowed by the desert each day. In recent years, one after another sandstorm has acted as severe warnings for this change. • The area of wood is being reduced. At present, 12 million hectares of forest is destroyed every year in the world, most of which occurs in the developing countries. One of the reasons for that is poverty, as people there have to change their valuable forest resource for foreign exchange; the second reason for the deforestation is that they are destroying the forest in order to open up new land. There being less land and more population in China, the situation of destroying the forest for opening up new land gets from bad to worse – the coverage rate of the forest is now only 13 per cent, 120th in the world. • Some species of creatures are dying out. Presently, the global species of creatures are experiencing the sixth time of dying out. Having been hunted fiercely besides suffering from the pollution of the environment, more and more species are confronting the disaster of extinction.


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• Loss in land and water. Since people are destroying the forest in large scale, lots of waste mountains and bare hills will lead to great floods when it rains, then the water and land resource will lose idly. All this soil is brought into the rivers and lakes, filling up the lakes and reservoirs and hence raising the riverbed, reducing the capacity of reservoirs and lakes and bringing closer the disaster of flood and waterlog. • The rubbish is piled into mountain heaps. At present, the increasing rubbish, including industrial and living rubbish has been a tricky problem for the world. Having been done up, the rubbish in China not only increases, but covers the cultivated land, polluting the air and water underground. • Air pollution in the cities. In China, the problem of air pollution is getting very serious. There are now 600 cities in China, in which less than 1 per cent can reach national first class in air quality. The reason for the pollution lies in two aspects – the first is that China uses coal which gives out piles of polluting material, as main energy resource; the second is that in China, more and more cars produce exhaust gas. All the above problems surprise and worry the world. Therefore, when opening and exploiting Beibu Gulf, we cannot treat them lightly. The relevant document shows that a quarter of all illnesses are caused by environmental pollution. It is estimated that 2 million people every year die earlier from inner or outer polluted air. Lots of developed countries gets their achievement at the expense of developing countries; they are exporting their industries and their influences to the developing countries. In food, the global agricultural loss caused by plant diseases and pests is estimated to be 14 per cent. The report says that the accelerating speed of planting area for crops has reduced since 1987, but the usage density of land is increasing badly. The unsustainable way of land usage causes land degeneration and becomes a threat in terms of weather change and to existing species. It has threatened a third of the global population by pollution, land erosion, water depletion, and increase in the amount of salty soil and ecosphere breach. The population growth, over-consumption and trend from consuming crop to meat continuously will increase the demand of food 2.5 times to 3.5 times of nowadays’. Globally, the situation that living species face is looking bleak. According to estimations, 60 per cent of the function of the ecosystem has degenerated or is being used in an unsustainable way. From 1987 to 2003, the number of existing vertebrates in fresh water was reduced by nearly 50 per cent, faster than the species on land or in sea.


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Lessons Drawn from Others’ Mistakes in Opening and Exploitation Guangxi’s aim of opening and exploiting Beibu Gulf is to turn this region into an integrated economic zone with better infrastructure, stronger competitive port and ideal industrial distribution, and finally into a city group with the most influence in the southwest area of China, a China-ASEAN regional centre of process and manufacture, logistic distribution, business and trade as well as information and cultural exchange. The historical reality proves that people’s developing activities always pay the price of environmental destruction. So how should Beibu Gulf, the later developing area protect the environment to the utmost? The issue attracts a general attention from domestic and foreign experts. In the seminar on PanBeibu-Gulf economic cooperation held in July 2007 in Nanning, the capital of Guangxi, China, the environmental issues of Beibu-Gulf’s exploitation were specially attended to by the participants. Generally speaking, there are blue skies, white clouds and fresh air everywhere in Guangxi; thus we should safeguard this clearest area, in the development of Beibu Gulf. We should not follow the same old way of polluting first and dealing with the problem later. In the course of exploitation, we should not only introduce investment, but also protect the environment and continuable development. The Beibu Gulf which lies in the northwest of China’s South Sea is not only China’s nearest corridor from the seaport of the southwest area of China, but also China’s cleanest area. But with the great promotion of exploiting Guangxi Beibu-Gulf Economic Zone, a large scale of population pours into Beibu Gulf, causing the city scale here to expand. So, Beibu Gulf faces more and more pressure in protecting its environment and maintaining its environmental balance. Beihai’s silver seashore, which is called “the first global seashore”, had received a lesson of exploitation. In the early 1990s, in the first civil tourist developing upsurge, there were lots of buildings built and run by different owners in the main viewpoint of this seashore within slightly more than one year, such as nursing homes, hotels, rest houses and so on. It is proved by facts that buildings became Silver Seashore’s environmental killers. By far the buildings here have been removed and its true face is recovered. The exploitation of China’s Bohai Bay offered us a reverse lesson. Bohai Bay possesses rich land and natural naval resources. It is the most developed economic area in the north of China, covering an important position in Chinese economic development. However, while people are highly enthusiastic to see Bohai’s economic development, they are on the other hand worried about the worsening environmental issues here. According to official estimations, it takes Bohai Bay 16 years to exchange its seawater


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once. The capacity of Bohai Bay is very limited, and its self-cleaning ability is very poor, but the polluting degree of the Liao River, Hai River and Yellow River that pour into the Bohai Bay are placed respectively as the first, second and fourth in the seven water-systems of China. Lots of industries of fertilizer, papermaking, leather, chemical fiber, aluminum industries and rubber industries lie along the bank; thus, the industrial waste water handled or unhandled flows along the land surface into Bohai Bay. The polluted water Bohai Bay receives every year is 2.8 billion duns, covering 32 per cent of national polluted water, and the polluted solid waste it receives every year is more than 0.7 million duns, covering 48 per cent of national polluted solid. Presently, Bohai’s environmental situation is as follows: land-sourced pollutants increase continuously, the pollution in the sea area is worsening, and the scope expanding; the disaster of red tide occurs occasionally; the fishery resource is decaying; the marine eco-environment is degenerating, and the species of marine creatures are suffering an obvious decline. If decisive measures are not taken to prevent the pollution, Bohai will be a Dead Sea within 10 years. Even if one drop of polluted water is not permitted to fall into Bohai then, it will take at least 200 years for itself to clean. As for the pollutant sediment in the bed of the sea, it will take even longer to deal with it up. From the national level, we had suffered large losses from the bad environment: firstly, the Great Leap Forward activity in 1957 not only led China into a difficult economic situation, but accelerated the environmental pollution and ecological breakage. Especially during 1966-1976, the environmental pollution and ecological breakage reached a fearsome level, and finally led to the pollution of acid rain, greenhouse effect, ozonosphere breakage, land desert, decline of forest area, species’ dying out, reduction of water resource, loss of water and land, rubbish disaster, air pollution and so on. The past failure should be the lesson of the future. Bohai Bay’s developing way is a mirror, the bad result of the Chinese Great Leap Forward left us pain of snake biting, these two lessons are unforgettable. To avoid the same mistakes, we should think of the pain after the failure, and thus profit by the lessons of the past, by trying not to let Beibu Gulf be the second Bohai Bay. Nowadays, the environment and situation of construction projects of Guangxi Beibu-Gulf economic zone is good. It manifests the following: firstly, good developing opportunities; secondly, good developing environment, in that there is support for the strategic idea of opening and developing Beibu Gulf; thirdly, good developing foundation, as the building and development of the economic zone has achieved a good start, the infrastructure such as the


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road net, channel, electricity and water supply and drainage has been more perfect, some large industries and programmes have been introduced, the steps of opening outward gets faster; fourthly, good developing tendency; and lastly, large developing potentiality, in that the most urgent affair is to strengthen its overall planning and coordination, as well as put the programmes into effect. To be of importance, the eco-function plan should be strengthened and a monitored control system of environmental protection should be established. Environmental Protection Must Be the Most Important and First Work in Beibu Gulf’s Opening Outward and Exploitation For a long time, dismantling the old and building the new occurred constantly in construction, and some natural resource and culture heritage confronts a severe destruction. When planning and building cities and towns, how should people protect the natural resources, embody the cultural specialties, protect the historic and cultural heritage, maintain the local color, national color and traditional scene? It’s an important project placed before the Beibu Gulf‘s relevant countries and regions. Take mangrove protection as example. Mangrove is a kind of ecobeneficial forest and is an important part of the coastal backbone forest shelter belt. It’s an important eco-building content to strengthen the protection of mangrove wetland, and thus an important duty for forestry authorities, as it helps in maintaining the security of people’s lives, properties in coastal area and social stability, accelerating the coastal economic and social development. Presently, with the fast establishment of China-ASEAN Free Trade Area and the pan-Beibu Gulf cooperation from imagination to reality, the panBeibu Gulf area is becoming an impressive hotspot for investments and fast developing economic zone. Paying attention to and protecting Beibu Gulf’s green sky and blue water has been a common hot topic. Under the historic background of opening and exploiting Beibu Gulf, new demands to protect the mangrove have been made. As an important part of the Beibu Gulf area, Guangxi is located in the connecting area of the China-ASEAN Free Trade Area, Pan-Beibu Gulf, Great Mekong sub-regional area, Chinese Pan-Pearl Delta and six southwest provinces. The total area is 236,000 square kilometers, while the population here totals 49 million. Guangxi is rich in creature resources with an important ecological position. It is also an important region in national ecological construction. Guangxi belongs to areas of subtropical monsoon climate with plenty of rain. As the rain and the heat shares the same season, there are rich species of creature and lots of kinds of plant.


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In recent years, in the light of the request of scientific development, Guangxi strives to take wooden resource protection, strengthening the ecoconstruction as a way of emphasis in promoting the economic development. Organizing six projects of forestry ecosystems, such as the compensative projects of forest ecological benefit, projects of returning land for farming to forestry, the project of wildlife and nature area, the pilot project of dealing with stony desertification, the project of rural ecology and energy, organizing the activities of Establishing Green Homes and New Rich Villages, promoting insistently the afforestation, fulfilling carefully the project programmes of protecting national wetland, tightening the legal supervision, and arousing widely social forces to participate in the forestry works, so the obvious result was gained in the protection of forest resources and the improvement of the ecological environment. At present, the total forest area in Guangxi is 12.52 million hectares, places the sixth largest in China; the forest coverage rate of which is 52.71 per cent, the fourth highest rate in the country; total accumulation of live timber is 510 million cubic meters, the seventh largest of China; the gross of marsh gas tank is 2.937 million, while the rate of residence is 36.7 per cent, the first of China. Fifty-nine protective areas of natural resource with the total area of 1.49 million hectares have been established, protecting effectively 80 per cent of Guangxi’s eco-systems on land, 20 per cent of important wetland and 45 per cent of mangrove, as well as preserving Guangxi’s best Proterozoic broadleaves. Since Guangxi’s ecological situation is continuously improved, last year the gibbons with black cap which is considered to be extinct in China for over 50 years and dying out in the world were discovered in Guangxi province. In Guangxi-Beibu Gulf’s new round of opening outward, exploitation and building, Guangxi government pays close attention to the eco-environmental protection and forestry building. From a strategic and long-term developing view, they propose a regional ecological strategic aim to build Green Beibu Gulf, protect the blue sky and sea and accelerate the concerted development of economy and society. The proposal of the aim makes a higher claim for us to protect the natural resource and forestry. Guangxi’s aim to develop Beibu Gulf in the future is to make the infrastructure more perfect, make the ports here more competitive with more ideal industrial arrangement, as well as attempt to be the centre of China-ASEAN regional process and manufacture, logistic, business and trade, information and cultural exchange. Such a great concept of building! Can Beibu Gulf bear the weight? Can its natural ecology be well protected? To develop Guangxi Tonkin-Gulf area in an orderly fashion, Guangxi has established a Guangxi committee of Beibu Gulf planning and management, as a whole planning and coordinating


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the infrastructural building, layout of great industries, integration of coastal resource and management of the overall plan of four cities, namely Nanning, Beihai, Qinzhou and Fangcheng. Fangcheng city is one of the twelve pivotal ports in 24 coastal cities, and is the largest port in the west of China. In the course of quickening the construction of port and coastal industries, Fangcheng city steps in the way of new industrialization, prohibiting the programmes of high pollution, high consumption, high output with low input to start, strengthening the environmental calculation, monitoring and protection, controlling strictly the utilization of coastal area, protecting well the natural resources such as the mangroves. Tang Shibao, Mayor of Qinzhou City, says: Firstly, do well in the environmental assessment during the revision of the Urban Master Plan of Qinzhou. A beard well lathered is half shaved. Qinzhou City will start with three respects: from the source, Emergency Mechanism and Longterm Mechanism, establish strictly a responsible system of environmental protection, and strengthen environmental protection in ways ranging from inviting investment to selecting investment. The sewage treatment design of the million-ton refining project under construction has changed from secondary discharge standard to first grade. Several billion yuan has been invested as a result. Beihai was self-imposing when dividing the Environmental Function Zone. 78 square kilometers urban district was determined as first class air quality function zone. Air quality, surface water quality and noise environment quality has been strictly controlled. 7,000 million yuan has recently been invested in transformation, relocation, closing and governance of more than 170 traditional enterprises and contaminative factories, such as papermaking, printing and dyeing, starch, ceramic and so on. More than 20 projects which don’t meet the requirement of the first class air quality control have been rejected during the same time. In 2005, the adjacent sea area of Beihai City was mostly first class clean water, among which is the famous Silver Seashore where excellent water was provided 81.9 per cent of a year. Mayor of Beihai city Wen Kahua says with confidence: Beihai’s object is to be the most suitable-to-live “Chinese Coastal Back Yard Garden”, the central city of Beibu Bay’s regional internationalization. In order to protect the regional environment, an offshore area functional zone, marine functional zone and Beihai Action Plan have been made, basic works such as environmental Capacity calculation have been accomplished, and coastal industrial zone environmental impact assessment has been organized and developed. Usage of Guangxi Marine Area was promulgated and efforts have been made to keep good regional environmental quality.


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Future Opening and Development Measures According to the data concerned, diseases caused by environmental factors account for 25 per cent of all kinds of diseases all around the world. There are about 200 million people who die of indoor or outdoor air pollution every year. In developing countries, there are almost 300 million people who died of diseases related to water, and most of the victims are ≤5 years old. Developed countries acquire achievements in pollution treatment while damaging developing countries’ interests. Industrial production and its effects have been transferred to developing countries. What a group of astonishing numbers! Never shall it be neglected under the new situation of Beibu Bay construction! Beibu Bay is among the cleanest areas in China. It’s actually a tranquil and isolated bay, merging into regional and even world trend. All industries will develop at the same time. A new round of development in Beibu Bay meets common development of all industries, absorbing capital to solve the key problem of fund shortage, and encounter environmental problems: Coordinate efforts from all sides. Regional characteristics of Beibu Bay’s environmental problems are more obvious compared to economic problems. That’s because regional eco-chains are connected, and the dependent degree of ecological environment among adjacent areas is rather high. The region includes Beihai, Fangcheng, Qinzhou, Zhanjiang, Haikou of China and seven major cities of Vietnam, including Haifang and Xialong. Cooperation between regional government is therefore strngthened, establishing Beibu Gulf Rim Economic Development and Environmental Protection committee, which released the announcement of protecting Beibu Gulf’s regional environment and strengthening its publication to promote the protection and development. Check strictly on the transferred and introductive industries. It is certain for Beibu Gulf to attract investment from outside when opening and developing, but in the course of introducing investment, we cannot lower our threshold, we should consider the environmental cost even while thinking of its economic benefit. Meanwhile, when putting forward the policy of lower threshold, we should keep enough place for future development, not loosening environmental needs only for political achievement. If we can not check on the pass well, the new projects will be tomorrow’s polluting ones, so we should prevent the environmental pollution and ecological destruction from the source. Formulate the principles of paid use environment, paying for environment. Environment is a kind of resource, it should not be developed and used


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without payment. The projects which are harmful to environment should pay for it. Therefore, we should levy a tax in the principle of paying for sewage, for utilization, and for development and damage. Build up the idea of a Beibu Gulf brand of resource and environment. In order to protect the brand and realize continuable development, we should pay high attention to environmental protection and take precautions. When opening and developing, take some corresponding measures; under the direction of scientific development, try to make nature harmonize with human; and, last but not least, do not exchange the sacrificed eco-environment with temporary prosperity. Try to do as follows: development is important, but environmental protection comes first; we need not only silver and golden mountains, but blue water and green mountains. Strengthen the cooperation in infrastructure construction and scientific research. Establish the monitoring network of regional environment and information platform for public environment, strengthen the cooperation of environmental monitors in respective regional cities; Timely, accurately and perfectly grasp the water situation, quantity of air pollution as well as its changing trends; realize the regional information shares and exchange, providing with scientific strategic foundations for the regional water and air pollution. Intensify the calculation of the environmental effect in energy restructure. Establish the general index systems of regional resource and environmental calculation; establish the research funds for the environment and resources, strengthen the research work and industrialize structure of energy techniques, clean resources, utilize renewable resource and so on. From the angle of continuable development, we should introduce more new projects by lowering the energy consumption in cleaning producing, and reducing the pollution discharge, thus saving resources and emptying more environmental space. From the angle of global marine resources, we should pay attention to the following aspects when utilizing and developing Beibu Gulf: Developing and protecting the ocean territorial resources. The natural resources of Beibu Gulf sea area is a part of territorial resources, and is the developing foundation that Beibu Gulf lives by. Ocean resources not only has great potential for development, but also the double tasks of being protected urgently, so we should implement the strategy of developing reasonably to make Beibu Gulf a base of developing continuably the ocean resource. Beibu Gulf’s mineral resources include oil, gas, gas hydrate, placer and so on. Its developing potential is enormous. All levels of government in Beibu Gulf will strengthen the exploration of ocean mineral resources, increase the known reserves, and enhance the ensured degree of national resource. Try to find


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large oil and gas fields so as to increase the ocean gas output. Pay attention to the protection of the marine life resources that are declining, and reduce the maritime fishing to zero or even to a negative growth so as to recover the resource of main kinds of fishes and important fishing ground. Utilize scientifically and reasonably the shallow offshore waters and beaches that is suitable for aquaculture. Reduce the self-pollution of farming industries, maintain the eco-situation of farming fields, promote actively the ecological and optimizing farming ways. Utilize variably the ocean resources abroad. According to the relevant regulation of the United Nations Convention on the Law of the Sea, the ocean resources of lots of global coastal nations can be developed cooperatively with foreign countries. According to Chinese national conditions and peculiarities of ocean resource, from the strategic angle, we should not only tap the potential of ocean resources, but go out of the country and utilize variably foreign resources. Make use of Beibu Gulf’s political and geopolitical strength by trying to cooperate with coastal neighbouring countries and nations with better gas conditions and resources, as well as exploring and developing its maritime gas resources and optimizing the distribution of resources. Develop high technology and promote the utilization of ocean resource. The development of ocean resources should be supported by marine technology, with the aim of promoting the development of resources and enhancing the contribution rate. We will develop the exploration technology of ocean resource to find new developable resources; develop the technology of utilizing the ocean resource to get a high effect with low cost; develop the ocean resource of low density and grade, high developing difficulty and high cost; develop the fine processing of marine resources; develop and utilize the marine functional food, marine medicine product, fine chemical product and so on, promote the rate of second utilization and junk recycle; develop the protection of marine environment and technological system for ecorestoration, including the behaviour and influence of pollutants, the biological effect of pollutants and monitor, forecast, control and manage technology of partial ecological change so that we can be prepare for recovering the coastal eco-environment. Establish the economic mode of marine ecology. There have been severe eco-economic troubles in the ocean, such as the over-development of important ocean resource, degeneration of marine eco-environment and so on which influence greatly coastal development. The continuable utilization of ocean resource is decided together by marine environment, marine resource, marine development as well as the development of coastal economy and society. The development of ocean resource steps in the way of utilizing


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resource and developing industries continuously, developing ecology with high quality, increases continuously the developable resource (but the developing scale must be limited in the bearing capacity of marine resource and environment). Participate actively in the scientific research of global ocean and protection of ocean resource. Participate actively in all kinds of ocean affairs of the UN system, contributing to the development of ocean science, protection of ocean resource and environment, perfecting the regulation of the ocean resource and environment protection. Participate in the international activities of global and regional researches on ocean science, international cooperation on the development and protection of ocean biological resource, international cooperation on the protective field of ocean ecology, as well as international cooperation on the exploration and exploitation, environmental protection of international seabed area, making a favourable environment and condition for China to utilize the global ocean resource. Work out and perfect the developing programme and the protection of ocean resources. The exploration and exploitation of ocean resources need the macro plan and guidance, as well as need to establish the layout system of resource. Lay out a necessary programme for special resources, such as a programme of fishery resource, ocean oil, gas resource and so on as well as regional local programmes, as well as form a programme system of nations, provinces, cities (counties). Straighten out the relations of different kinds of exploiting programmes for ocean resource, relations between resource exploitation and environmental protection, make sure the reasonable exploitation of ocean source and its effective protection. Establish and perfect the management system of ocean resources. Management of ocean resources is a piece of system engineering. Strengthen the management of utilizing sea territory and ocean resource, enforcing the law of exploiting management and ocean resource utilization, and ensuring to exploit and protect the ocean resource according to law. Note * Dr Huang Yaodong is a research fellow and an associate professor at the Institute of Southeast Asian Studies, Guangxi Academy of Social Sciences, China. By far, he has participated in 10 projects on international issues, and published more than 200 articles in the papers or journals. At present he is working on a project entitled “A Research on the Role that Overseas Chinese Business Plays in Guangxi’s Beibu Gulf Construction”. This chapter is a part of his project entitled “How to Protect the Beibu Gulf’s Environment”.


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References “Environmental Protection Important for Economic Growth” . Gu Xiaosong 古小松, Huang Yaodong 黄耀东 et al. (2006-2008),《中国-东盟年鉴》[China-ASEAN yearbook], 线装出版社出版 (Chinese Wire Publishing House). Gu Xiaosong 古小松, Huang Yaodong 黄耀东 et al. (2007),《泛北部湾区域合作研究》[Research on Pan-Beibu Gulf regional cooperation], 广西人民出版社出版 (Guangxi People Publishing House). Gu Xiaosong 古小松, Huang Yaodong 黄耀东 et al.,《泛北部湾合作发展报告 (2007)》[Pan-Beibu Gulf cooperation development report, 2007], 中国文献出版社出版 (Chinese Document Publishing House). 《环境保护部发布2007年中国环境状况》[Chinese environmental situation of 2007 was announced by the Ministry of Environmental Protection], from Environmental Protection, China . Jiang Xuelin 蒋雪林,《广西: 不会以牺牲环境来发展北部湾》[Guangxi will not sacrifice the environment for the development of Beibu Gulf], from http:// www.3608.com/News/Industry, 2007.06.07. Qin Guanghua 覃广华 and Liu Yuanyuan 刘媛媛,《北部湾开发直面环保挑战》 [Exploitation of Beibu Gulf confronts the challenge of environmental protection], from http://www.GX.xinhuanet.com, 2007.9.3. 《体制困境造成环境与人心的双重污染》[System environment leads to the double pollution of heart and environment], 南方都市报 (Southern City Daily), 27th March 2008. Zhang Xiaosong 张晓松 and Du Wenjing 杜文景,《城乡规划法注重保护自然和历史文化遗产》[Planning law for both urban and country should pay attention to the inheritance of nature, history and culture], from http://www.GX.xinhuanet. com, 2007.10.28.


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Import Demand Function for ASEAN Five, China, Japan and Korea ♦ 133

Chapter 8 An Analysis of the Import Demand Function for ASEAN Five, China, Japan and Korea Wendy Chen-Chen Yong and Siew-Yong Yew

Introduction ASEAN-5 plus 3 (Malaysia, Thailand, Philippines, Singapore, Indonesia, China, Japan and Korea) have undergone substantial trade liberalization. Initially, ASEAN-5 plus 3 began with a policy matrix that stressed import substitution across a wide range of industries and products. This evolved later into outward looking policies that stressed exports and the acquisition of foreign technology. The shift toward export promotion with reductions in tariff rates complemented by the inflow of foreign direct investment and supportive macroeconomic policies produced an export boom that lasted over twenty years. The ratio of export to GDP increased by leaps and bounds. Although export of goods and services as a percentage of GDP for ASEAN-5 plus 3 increased for the past decades, the value of import as a percentage of GDP also followed an upward trend (International Monetary Funds, various issues). There has also been a dramatic turnaround in the external balance for ASEAN-5 plus 3. These countries were running huge surpluses in 2000 and 2001, compared with large deficits just a few years earlier. The primary reason was the collapse of imports. Export growth can lift a balance-of-payments constraint on demand and therefore permit faster growth supplies to be utilized. Export growth may also create a virtue circle of growth by virtue of the link between output growth and productivity growth. As a result, the share of export in GDP has also risen as the region became more industrialized. A greater reliance on export has helped the region to sustain rapid growth rates but at the same time it has made the region more dependent upon import demand from the rest of the world, particularly the industrialized countries. The rate of growth is not only crucially dependent on the growth of export but also the income elasticity of import demand. Export-led growth models always seem to neglect the behaviour of imports. 133


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134 ♦ Wendy Chen-Chen Yong and Siew-Yong Yew

Furthermore, in the long run, unless the ever growing deficits can be financed, it is difficult for a country to achieve a growth rate higher than the rate consistent with balance of payment equilibrium on trade balance at aggregate level. Trade deficits may be financed by high interest rates in the short run which in turn, discourage investments on which the growth of output ultimately depends. Thus, the analysis of the determinants of import flows for ASEAN-5 plus 3 is important. The present study is organized as follows. The next section presents the methodology. The subsequent section presents the findings of the empirical results. Finally, the last section addresses the concluding remarks and policy implications of the study. Methodology In this study, the import demand function for a panel of ASEAN-5 plus 3 countries follows the modern empirical literature on the estimation of longrun import function (Rijal et al. (2000), Anaman and Buffong (2001), Emran and Shilpi (1996), Sinha (1997), Authukorala and Menon (1995), Mah (1999), Konno and Fukushige (2003)). The ratio of real export plus real import to the real GDP is included to test for the effect of trade liberalization on import growth. The extended import demand function to be estimated is as follows:

𝑚𝑚𝑖𝑖𝑡𝑡 = 𝛽𝛽0 + 𝛽𝛽1 𝑌𝑌𝑖𝑖𝑡𝑡∗ + 𝛽𝛽2 𝑃𝑃𝑚𝑚𝑖𝑖𝑡𝑡 + 𝛽𝛽3 𝐿𝐿𝑖𝑖𝑡𝑡 + 𝜇𝜇𝑖𝑖𝑡𝑡

where

𝑚𝑚 𝑖𝑖𝑡𝑡 is the log of the real imports, 𝑌𝑌 𝑖𝑖𝑡𝑡∗ is the log of the real domestic income, 𝑃𝑃 𝑚𝑚𝑖𝑖𝑡𝑡 is the log of the relative import prices,

Given p mit 

p mit , ei p dit

pd the GDP deflator and is where pm is the import price, is e the real exchange rate of respective ASEAN-5 plus 3 country.

𝐿𝐿𝑖𝑖𝑡𝑡 is the log of trade liberalization (the share of real export plus import in GDP), 𝜇𝜇𝑖𝑖𝑡𝑡 is the residual term, and 𝛽𝛽’s is the vector of parameter.


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𝛽𝛽1 is expected to be positive for import demand function. 𝛽𝛽2 is expected to be negative and 𝛽𝛽3 is expected to be either positive or negative. We then, apply Im, Pesaran and Shin (2003) and Levin, Lin and Chu (2002) tests for the unit roots. The empirical evidences are demonstrated through the application of Pedroni’s heterogeneous panel cointegration tests. The idiosyncratic, panel and group-mean cointegrating vectors are then estimated using the FMOLS procedure developed by Pedroni (2004). To examine the import demand function, we employ the real import volume which is the nominal import (measured in millions of US dollar) deflated by the import price deflator (2000=100). The relative prices variable for import demand function is the import price divided by the GDP deflator with 2000 as the base year. The effect of trade liberalization is captured by the real export plus real import as a share of GDP. The real gross domestic product indicates the real income for the respective country (measured in USD). All data are collected from the International Financial Statistics, World Bank database. Annual frequency data is chosen for the analysis due to the fact that most of the sample countries have high frequency of data and quarterly data for import price is not available. The analysis is based on a balanced panel. Due to the limitation of data on import price, the analysis was conducted only for the period of 1970-2003. Empirical Results To examine the stationarity of the series, we subject the data to both Im, Pesaran and Shin (IPS) (2003) and Levin, Lin and Chu (LLC) (2002) unit root tests. All series are transformed into natural logarithm form before conducting unit root tests. Table 8.1 presents the IPS w-statistic and LLC t* statistics. From Table 8.1, the null hypothesis of a unit root cannot be rejected for all the series in level, as indicated by both the IPS and LLC tests. For series in the first difference, the results of both IPS and LLC have rejected the hypothesis of unit root for all series, implying that all series are integrated of order one (I(1)). Hence, the series are expedient for cointegration analysis. Table 8.2 shows the cointegration test results for the variables of the import demand function. From Table 8.2, there is evidence of cointegration among the variables. This finding is different from Senhadji (1998), Sinha (2001) and Tang (2004) who found that cointegration exist only for Malaysian and Singaporean import demand model for ASEAN-5 countries. However, Bahmani-Oskooee and Kara (2005) found that there is cointegration for Japan, Korea, Philippines and Singapore import demand models. The panel – υ test


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1.219[4] 0.995[5]

-2.013[5] -1.162[1]

-0.434[0] -0.803[3]

Real GDP

Relative Import Prices

Trade Liberalization

Trend

-13.875[0]* -12.604[0]*

-11.693[5]* -6.413[4]*

-7.676[1]* -7.257[3]*

-13.153[0]* -11.787[0]*

No Trend

1st Difference Trend

-1.296[0] 1.208[3]

-0.041[0] -0.525[3]

-0.863[3] 0.873[5]

1.206[1] -1.189[1]

No Trend

Level

-14.067[0]* -12.668[0]*

-12.938[5]* -4.500[4]*

-8.959[1]* -8.548[3]*

-13.083[0]* -11.737[0]*

Trend

1st Difference No Trend

LLC

Notes: Asterisk (*) denotes significant at 5% significance level. Optimal lag lengths are provided in the parentheses.

4.869[1] -1.171[1]

Real Import

Trend

No Trend

Level

IPS

Table 8.1 Unit Root Tests of Import Demand Function for ASEAN-5 plus 3 Countries


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Table 8.2 Cointegration Analysis Test of Import Demand Function for ASEAN-5 plus 3 Countries Test (lag = 4) Panel – υ Panel – ρ Panel – t Panel – adf Group – ρ Group – t Group – adf

Constant without trend 1.716** -1.074 -2.401* -2.626* -0.278 -2.482* -2.612*

Note: **,* Reject the null of no cointegration at 5% and 1% significance level respectively.

significantly rejects the null hypothesis of no cointegration. Furthermore, we find some evidence of cointegration at the group level. Since there are co-movement between the variables in the import demand function, there is reason to expect that relative import prices, domestic income and trade liberalization have some impact on import demand for ASEAN-5 plus 3 countries. The idiosyncratic and panel elasticities of import demand function are estimated by using Pedroni’s fully modified least squares (FMOLS) procedure. The results of the FMOLS regression are shown in Table 8.3. From Table 8.3, we find that the individual elasticities with respect to relative import prices are negative and significant in all countries as expected by theory. A rise in import price relative to domestic price indicates an improvement in the competitiveness of domestic producers relative to foreign suppliers of goods and services as their destination. This indicates that the import demand for ASEAN-5 plus 3 are affected by the relative import prices. Among others, the estimated coefficient for Thailand is the highest, -2.12 (at 1 % significance level). Korea has the least price elastic import demand. Import demand is found to be price elastic for Japan, Thailand, and Singapore, where Thailand has the highest price elasticity of import demand. The price elasticity for Japan, Thailand and Singapore are -1.11, -2.12 and -1.05 (at 1% significance level) respectively. The long-run price elasticity of -1.11, means that, ceteris paribus, a one per cent increase in relative import prices will lead to a fall in imports by 1.11 per cent for Japan. Similarly, a one per cent increase in relative prices will lead to a fall in imports by 2.12 per cent for Thailand


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Table 8.3 FMOLS Regressions of Import Demand for ASEAN-5 plus 3 Countries Country

Relative Import Prices

GDP

Trade Liberalization

Japan Thailand Philippines Singapore Indonesia Malaysia China Korea

-1.11 (-28.22)* -2.12 (-11.11)* -0.88 (-58.70)* -1.05 (-66.65)* -0.92 (-17.18)* -0.78 (-11.18)* -0.80 (-18.68)* -0.47 (-9.74)*

1.21 (2.88)* 1.09 (1.21) 1.23 (1.94)*** 0.95 (10.77)* 0.57 (5.53)* 0.15 (4.51)* 0.99 (0.09) 1.34 (8.99)*

1.44 (4.04)* 0.73 (2.00)** 1.15 (2.36)** 0.99 (0.26) 0.77 (1.03) 2.92 (15.09)* 1.07 (0.93) 0.01 (6.33)*

Group-mean

-1.02 (-78.30)*

0.94 (2.08)**

1.14 (4.52)*

Notes: ***,**,* Significant coefficient with 10%, 5% and 1% significance level respectively.

t-statistics are provided in the parentheses.

and one per cent increase in relative import prices will lead to a fall in imports by 1.05 per cent for Singapore. The price inelasticity of import demand for Philippines, Indonesia, Malaysia, China and Korea are due to the fact that the bulk of their imported goods are essential goods, such as capital goods. The import of capital goods is increasing as these countries become more industrialized. In fact, capital goods import may become even more important for a country which is developing. Furthermore, ASEAN-5 plus 3 is heavily dependent on imported oil, for which there are few domestic substitutes. As such, the respective governments should provide more support for local industries with low import content, especially resource-based industries. The income elasticities of import demand are positive and significant for Japan, Philippines, Singapore, Indonesia, Malaysia and Korea, indicating that the import demands of these countries are positively affected by their domestic income. Real imports would be expected to increase with real income for two reasons. Firstly, if an increase in real income leads to an increase in real consumption, with an unchanged distribution of income, more foreign goods will be purchased. If an increase in income also leads to an increase in real investment, then investment goods not domestically produced must be bought from abroad. However, our findings show that it is income elastic only for Japan, Philippines and Korea. There may be a trade-off between


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economic growth and balance of payments deficit if the income elasticity of import is found to be relatively high. Other things being equal, high long-run income elasticity of import shows that, economic growth is likely to worsen the balance of payments difficulties for Japan, Philippines, and Korea. On the other hand, the income elasticity of import demand is positive but not significant for Thailand and China. The imports are mainly necessity goods in Indonesia, Malaysia and China as the sizes of the estimated income elasticities are found to be inelastic. Our findings also confirm the positive impact that trade liberalization has on the import growth for Japan, Thailand, Philippines, Malaysia and Korea. The insignificant individual coefficient of trade liberalization for Singapore, Indonesia and China imply that trade liberalization has no significant impact on their import demand. Trade liberalization is found to have the largest impact on import growth for Malaysia (with the highest estimated coefficient of 2.92 at 1% significance level), followed by Japan (with the estimated coefficient of 1.44 at 1% significance level), Korea (with estimated coefficient of 0.01 at 1% significance level), Philippines (with estimated coefficient of 1.15 at 5% significance level) and Thailand (with estimated coefficient of 0.73 at 5% significance level). The results of group-mean estimates are also shown in Table 8.3. The results broadly confirm those of the individual estimates where the null hypotheses of unity are rejected at 5% significance level. For ASEAN-5 plus 3 as a whole, the relative import prices are negative and significant at 1% significance level with an absolute value of 1.02. This shows that, ceteris paribus, an increase in the relative import price is likely to leave the import bill unchanged for ASEAN-5 plus 3. Since the income elasticity of import demand is inelastic with an absolute value of 0.94 (at 5% significance level), an increase in the domestic income is likely to lead to a less than proportionate increase in the quantity of import for ASEAN-5 plus 3. Other things being equal, inelastic long-run income elasticity of import shows that, economic growth is least likely to worsen ASEAN-5 plus 3’s balance of payments difficulties. Besides that, trade liberalization gives a significant impact on import growth for ASEAN-5 plus 3 with the coefficient of 1.14 (at 1% significance level). Conclusion Trade liberalization has improved the trade flows of ASEAN-5 plus 3. An increase in the domestic income is likely to lead to a less than proportionate increase in the quantity of import for ASEAN-5 plus 3. Other things being


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equal, inelastic long-run income elasticity of import shows that, economic growth is least likely to worsen ASEAN-5 plus 3’s balance of payments difficulties. Furthermore, an increase in the relative import prices is likely to leave the import bill unchanged for ASEAN-5 plus 3. The ease of the balance-of-payments constraint on growth for this region has appeared due to favourable changes in growth of real capital inflows. Other things being equal, high long-run income elasticity of import shows that, economic growth is likely to worsen the balance of payments difficulties for Philippines. Although Japan and Korea have the same finding as Philippines, but these countries are running trade surpluses. Therefore, Japan and Korea may be described as resource constrained (McCombie, 1989). McCombie argued that there is a maximum rate at which goods can be produced by them to fulfill a large growth of demand for their goods in the world. This is affected by the speed of inter-sectoral mobility of labour. This reveals that the huge surpluses for Japan and Korea were not coming from the excessive supply of the goods over the strong demand for them in the domestic market. The fact is that the real GDP growth rate was slowing. Thus, we might conclude that a weak domestic demand has been the source of the huge Japanese current account surplus. The income elasticities of demand for import are different among the countries of ASEAN-5 plus 3. The differing performance in external markets among ASEAN-5 plus 3 might be attributed to the differing characteristics of goods produced which determine the income elasticity of demand for country’s propensity to import. Goods produced can generally be characterized into two basic groups; (1) those whose production is based on naturally-given comparative advantage (mainly primary products) and (2) those whose production is based on man-made comparative advantage (mainly knowledgeintensive manufactured goods). It is true that in the early stages of growth for ASEAN-5 plus 3, the countries relied on the exportation of natural resourceintensive products, but the emphasis is on resource-intensive manufactures rather than agricultural primary goods and unprocessed minerals and raw materials. For instance, Philippines focuses on manufactured wood products and clothing; Thailand focuses on textiles, clothing and processed food. However, ASEAN-5 plus 3 countries concentrate more, as they advanced, on knowledge-intensive manufacturing and less on resource-intensive manufacturing activities. From the empirical results, we find that the income and price elasticity of trade flows in ASEAN-5 plus 3 are different. One might argue that comparative advantage is not static but dynamic and can be created and acquired. Therefore, the income and price elasticity of trade flows for ASEAN-5 plus 3 will change as they become more advance.


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It is clear from this analysis that trade policy conditions are of paramount importance for import growth in the liberalization process. The results here provide empirical evidence supporting the premise that the elimination of trade policy distortions has strong and positive impact on import growth. The higher income elasticities after liberalization reflect an increase in the degree of openness to international trade of the countries analyzed. The hypothesis of an increase in price elasticities as a result of import reform is also confirmed in most cases. If import growth is faster than export growth in the process of trade liberalization, an important issue is the sustainability of the trade account deficit, and that depends on the sequence of reforms, the efficacy of real exchange rate as a balance of payment adjustment mechanism, and the inflow of foreign capital. Liberalization needs to take place in such a way as to maintain a sustainable balance of payments position; otherwise the resource gain from liberalization can easily be offset by real resource losses arising from the need for balance of payments adjustments (i.e., devaluation). Monetary policy can also contribute by ensuring that monetary growth is consistent with a stable domestic price level. Therefore, it may imply that the effectiveness of exchange rate policy as well as fiscal policy has successfully improve these countries’ external balances. To accelerate growth rates, ASEAN-5 plus 3 should emphasize more on the production of more attractive exports and by reducing the income elasticity of demand for imports. In addition to maintaining sound economic fundamentals, the adoption of active visionary planning to engineer new comparative advantages through industrial transformation and to create export market niches in selected products that capture larger proportions of world income growth is a necessity. References Anaman, K.A. and S.M. Buffong (2001), “Analysis of the Determinants of Aggregate Import Demand in Brunei Darussalam and the European Union”, ASEAN Economic Bulletin, 20(1), pp. 60-72. Athukorala, P.C. and J. Menon (1995), “Modeling Manufactured Imports: Methodological Issues with Evidence from Australia”, Journal of Policy Modeling, 17(4), pp. 667-675. Bahmani-oskooee, M. and O. Kara (2005), “Income and Price Elasticities of Trade: Some New Estimates”, The International Trade Journal, 19(2), pp. 165-178. Emran, M.S. and F. Shilpi (1996), “Foreign Exchange Rationing and the Aggregate Import Demand Function”, Economics Letters, 51, pp. 315-322. International Monetary Fund (IMF), International Financial Statistics, Washington D.C., various issues.


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Konnon, T. and M. Fukushige (2003), “Did NAFTA Cause the Structural Changes in Bilateral Import Functions between the US and Mexico?”, Journal of Policy Modeling, 25, pp. 53-59. Mah, J.S. (1999), “Import Demand, Liberalization, and Economic Development”, Journal of Policy Modeling, 21(4), pp. 497-503. McCombie, J.S.L. (1989), “‘Thirlwall’s Law’ and Balance of Payments Constrained Growth – A Comment on the Debate”, Applied Economics, 21, pp. 611-629. Pedroni, P. (2004), “Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis”, Econometric Theory, 20, pp. 597-625. Rijal, A., R.K. Koshal and C. Jung (2000), “Determinants of Nepalese Imports”, Journal of Asian Economics, 11, pp. 347-354. Sinha, D. (1997), “Determinants of Import Demand in Thailand”, International Economic Journal, 11(4), pp. 73-83. Sinha, D. (2001), “A Note on Trade Elasticities in Asian Countries”, The International Trade Journal, 15(2), pp. 221-237. Tang, T.C. (2004), “A Reassessment of Aggregate Import Demand Function in the ASEAN-5: A Cointegration Analysis”, The International Trade Journal, 18(3), pp. 239-265.


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Banking Reform in China ♦ 143

Policy Reform


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144 ♦ Chan Sok Gee


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Chapter 9 Banking Reform in China Chan Sok Gee

Introduction The People’s Republic of China (PRC) was founded in 1949 and led by the Chinese Communist Party when China was transformed into a centralized planned economy based on the practice of socialism. With no exception applied to the banking sector, the financial markets were gradually abolished with the withdrawal of all foreign banks from the banking industry in China by 1959 (Leung et al., 2003). Besides, it also witnessed the nationalization of all private banks. During this period, China operated in a mono-bank system led by the People’s Bank of China (PBOC) that formed through the consolidation of the former Huabei Bank, the Beihai Bank, and the Xibei Peasant Bank (Berger et al., 2009). Under this banking system, PBOC operated as both central bank and commercial bank for the country. Hence, it took responsibility in the implementation of monetary policy as well as engaging in the traditional banking activities such as accepting deposits and granting of loans to both individual and corporate customers. Thus, the whole banking industry was regulated with strict cash and credit plans following the production plans set by the State Planning Commission (Wong and Wong, 2001). All the banks’ branches operated under PBOC were responsible to ensure the effectiveness of the national production plans and there was no incentive for the banks to compete with each other. The banking reform started in late 1978 after the 13th Communist Party of China Central Committee meeting. The banking reform aimed to bring China to a more competitive and efficient banking system which will enable the latter to compete with its foreign counterparts. China’s banking reform can be divided into three phases as follows: – Banking reform after 1978. – Major banking reform after 1994. – Banking reform after 2001. 145


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Banking Reform after 1978 The first phase of the banking reforms in China focused on reinstate the state-owned specialized banks through the decentralization and rehabilitation process (Leung and Mok, 2000). The main objective of this reform is to convert the centralized economic planning into more market-based with the establishment of commercial banks that are independent from the monobank. Thus, the reforms were aimed to delegate greater autonomy in terms of decision making to the commercial banks as well as to encourage more active economic activities in the country. Subsequently, the banking system was expanded into several large stateowned commercial banks. The Big Four state-owned commercial banks emerged and were being designated by the PBOC to serve a specified lending division. For example, the Agricultural Bank of China setup in February 1979 was being assigned to receive deposits in the rural areas and grant out loans to agricultural sector as well as township industries. Besides, the Bank of China established in March 1979 was being assigned to accept deposits and loans for foreign exchange and international transactions. Next, in September 1983, the People’s Construction Bank was detached from the Ministry of Finance and come under the supervision of the PBOC with the main focus in funds allocations for capital construction. Finally, the Industrial and Commercial Banks of China was being assigned with the financing responsibilities of commercial and industries activities in urban areas. The main objective of the Four Big state-owned commercial banks was to serve the state-owned enterprises better with the goal to improve the overall productivity of the country. However, such action led to an unprofitable operations and poor performance of the state-owned commercial banks because they served mainly on the policy lending conduits for the government. Besides, most of the state-owned enterprises were not performing in the lending activities and led to high non-performing loans (NPLs) in the commercial banks. In terms of foreign penetration, the foreign banks entry was restricted where they were only set up representative offices of foreign financial institutions in the Special Economic Zone of Southern China started from 1985. In addition to that, the operations of foreign banks were limited to nonRMB businesses with the foreign-invested enterprises in China. Consequently, this made the banks to operate in a highly non-competitive environment because banks were being allocated with their owned focus even though they were allowed to engage in non-price competition in terms of deposits, foreign exchange, and trade financing business. This made the


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banks to have no incentive to compete with each others and living in their comfort zone since they are under the protection of the State Council. Due to this reason, the whole financial system had been inefficient in the early stage of reform. In addition to that, the monetary policy implementation was not effective and efficient during this period due to no clear outlines on the role of the PBOC as the central banks. Banking Reform after 1994 The China’s authority realized the important of a more competitive banking system and a real central bank in the country in order to create a sound and efficient financial market to withstand the shock from the outside economy. In 1994, the functions of state-owned commercial banks and PBOC being redefined as a result from major restructuring of the banking sector. Eventually, three policy banks, namely the State Development Bank of China, Export-Import Bank of China, and the Agricultural Development Bank of China emerged after the reform in 1994 to take over the policy lending from the state-owned commercial banks. The policy banks were operated under the leadership of State Council. The establishment of the policy banks indirectly increased the performances of the state-owned commercial banks because they were allowed to shift the state-directed lending out of the commercial banking. PBOC replaced the credit plan system with an indicative, non-binding target where commercial banks were free to lend their money to the corporate sectors and foreign-invested enterprises with high creditworthiness as long as inline with the asset-liability ratios and monetary policy targets. This increased the lending standards of commercial banks because the banks management was accountable bank performance. Besides that, the loan officers were also made responsible for any new non-performing loans, and state-owned banks chairmen became accountable in achieving the target up by the government. Consequently, loss-making state-owned enterprises were more difficult to obtain funding. This resulted in more efficient credit allocations environment and reduced the credit risks faced by the financial institutions. Nevertheless, the separation between policy banks and commercial banks was not complete because the state-owned commercial banks still engaged in policy lending. This was mainly due to lacked of market depth by policy banks due to not sufficient branch networks and capital to assume the level of policy lending (Chen et al., 2005). Following the reform, Central Bank Law and Commercial Bank Law was being promulgated in year 1995. The Central Bank Law was being carried


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out to legalize PBOC as China’s central bank and held responsible for monetary policy implementation and others central bank responsibilities such as the management of international reserves and exchange rate. In addition, PBOC was also accounted for the maintenance of financial system stability of the country. Table 9.1 presented the index of monetary freedom which indicates the effectiveness of the regulatory in their conduct of monetary policy in stabilizing the currency and market-determined prices. As indicated in Table 9.1, China did experience a gradual improvement in their monetary freedom from year 1997 to year 2001. The monetary freedom index improved from 62.7 in year 1997 to 84.1 in year 2001 which is about 34 per cent increased in the index. This might due to implementation of Central Bank Law that furthered defined the roles of PBOC which made the conduct of the monetary policy easier to be implemented and control. Table 9.1 Index of Monetary Freedom in China, 1995-2001

Year

Monetary Freedom

% Change

1995 1996 1997 1998 1999 2000 2001

68.4 61.5 62.7 68.2 75.2 84.0 84.1

– -10.01 1.88 8.75 10.35 11.63 0.10

Source: Holmes et al. (2009). The Wall Street Journal, p. 435.

Next, Commercial Banking Law was introduced in March 1995 to further relief all commercial banks in the country from government intervention except in the case of emergency (Wong and Wong, 2001). This freed the Big Four state-owned commercial banks from the control of regulatory and hence allowed them to compete in a healthier environment with permission grated to diversify their business operations into securities firms and insurance companies (Barth et al., 2004). The law also introduced new loans classification standard as well as the classification of NPLs which inline with the international rules in accordance to the Basel Committee on Banking Supervision.


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In terms of foreign banking in China, the first national banking law was promulgated in April 1994 in order to regulate the entry and scope of business of the foreign banks (Leung et al., 2003). Besides that, in 1998, PBOC permitted eight foreign license banks to obtain local currency funding and only in 1999 the foreign banks were allowed to conduct local currency business in neighbouring regions. By end of 1999, there were 25 foreign banks that permitted to conduct local currency business with the Chinese enterprises (Berger et al., 2009). Nevertheless, the foreign banks entry was restricted to coastal cities in the country. This was supported by the index of financial freedom in Table 9.2. Based on the indices in Table 9.2, one can conclude that there was no improvement in the financial openness of the country since year 1995. This served as the main caveat of the whole banking industry as the industry was reserved to the openness of the country financial market to the foreign participants. Table 9.2 Index of Financial Freedom in China, 1995-2001

Year

Financial Freedom

1995 1996 1997 1998 1999 2000 2001

50 50 50 50 50 50 30

Source: Holmes et al. (2009). The Wall Street Journal, p. 435.

Next, in dealing with the effects after the 1997 Asian Financial Crisis, PBOC had implemented several measures in reducing the NPLs as well as to safeguard the banking sector from excessive financial risks. Commercial banks especially the Big Four had been recapitalized with an injection of RMB270 billion into the banks in August 1998 (Mo, 1999). Furthermore, banks were also required to comply with the international standards in lending activities and classification of NPLs in strengthening the fundamental of the financial institutions. In conjunction with the capitalization, four asset-management companies were setup to unload NPLs in order to restore financial health of state commercial banks.


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Banking Reform after WTO (2001) In 2001 China re-entered into World Trade Organization (WTO). This had eventually brought China into another wave of reform. In creating a more efficient banking system, the reform mostly focused on the corporate governance and still being carried out up to today. In addition to that, liberalization processes also took placed after 2001 with the introduction of more liberalized interest rates, more fair treatment of tax rates within the banking industry, less ownership restrictions during takeover and merger, as well as more freedom in branching (Berger et al., 2009). Besides that, in year 2002 the China Banking Regulatory Commission (CBRC) in year 2002 was setup to deal with the issue of corporate governance in the country. CBRC was formed with the objective to promote financial stability and facilitate the development of financial innovation in the financial market. Besides that, it is also responsible to enhance the competitiveness of the Chinese banking sector so that the banking industry will be able to compete internationally. In this context, CBRC carefully monitored and improved the practice of corporate governance in the banking industry. Nevertheless, according to Zdenek (2007) CBRC is less efficient in their conduct because it posed very less autonomy due to the fact that it is under the control of the State Council and the Chinese Communist Party. In the recent years, banking reform in China mainly focus on corporate governance and risk management of the overall banking sector. Inline with this objective, two state-owned commercial banks, namely the Bank of China and the China Construction Bank were further recapitalized by transforming both banks into joint-stock companies with new corporate governance structure. This was aimed to increase the efficiency level of the commercial banks and introduce new risk management tools into the banking system. In addition to that, the recapitalization also brought in new strategic investors with minority ownership share to both banks with the hope to create a more diversify ownership structure in building capital strength as well as to take advantage of the counterparty’s management skills and advancement in technology (Podpiera, 2006). Besides that, state-owned commercial banks were encouraged to go for public listing both internationally and domestically to further strengthen themselves in terms of corporate governance. This is because the authority believed that by going for initial public offerings (IPOs), commercial banks will be able to improve their corporate governance practices as a result of the pressure brought by the capital markets which require more transparency in each company operations. Hence, listing was encouraged with the objective to


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enhance the information disclosure, improve transparency and public supervision, strengthen the capital structure, and improve corporate governance as well as to enable the state-owned commercial banks to become more genuine market participants. Next, in year 2005, the authorities started to encourage more integrated financial services. The universal banking concept is introduced to the banking system in bringing the banking institutions to the next level of banking operations with the aim to create a one-stop financial centre in the region. Hence, banks and other financial institutions were encouraged to diversify away from their core business which include not only commercial banking but also investment banking, securities and insurance businesses. Foreign banking was furthered liberalized and allowed to provide foreign currency services to the local residents and enterprises in year 2002. Furthermore, local currency market was also opened to the foreign banks in selected cities and areas started from February 2004. This allowed foreign banks to provide financing to local enterprises domestically and subsequently create more intense competitions among the foreign banks and locallyincorporated banks. In addition, foreign ownership participation was also encouraged in small Chinese banks. However, the share ownership had been limited to 20 per cent of capital for single owner. Year 2006 signified another important date for the foreign banking industry where the authorities lifted the client and regional restrictions on foreign banking operations to conduct RMB business in the PRC (PBOC, 2007). Finally, at the end of 2006, 62 Chinese and foreign banks were granted qualification for derivatives trading with the introduction of various derivatives products (PBOC, 2007). Table 9.3 and Figure 9.1 provide a brief review on the market concentration in terms of total assets of the banking sector in China. Based on Table 9.3, it is clearly indicated that banking sector was highly concentrated where the state-owned commercial banks posed more than 50 per cent of the market shares based out of their composition of the overall total assets in the depository institutions. Nevertheless, due to various measures taken by the authorities to increase the competition in the banking industry in order to increase the efficiency of the banking system, the market shares of the others commercial banks such as joint-stock commercial banks and city commercial banks started increased. For example, the market shares for joint-stock commercial banks increased gradually from 10.71 per cent in year 2003 to 13.78 per cent in year 2007. Apart from that, the foreign banks also started to gain momentum with an increase of the percentage of total assets of 1.44 per cent in year 2003 to 2.37 per cent in year 2007 out of the whole banking institutions.


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10.12 5.29 1.44 6.54 0.14

Credit cooperative banks

City commercial banks

Foreign banks

Other depository institutions

Rural commercial banks

0.18

6.20

1.84

5.40

10.30

11.54

7.63

56.91

2004

0.81

6.39

1.91

5.44

9.66

11.92

7.82

56.06

2005

1.15

6.08

2.11

5.90

9.33

12.39

7.90

55.15

2006

Notes: * credit cooperative – rural cooperative banks, urban cooperative banks, rural credit cooperative bank. * other depository institutions – non-bank financial institutions, post savings bank. Source: Author calculation based on information from CBRC Annual Reports, various issues.

7.69 10.71

Joint-stock commercial banks

58.07

State-owned commercial banks

Policy banks

2003

Type of banking institutions

Table 9.3 Market Shares for Types of Banking Institutions in China in Terms of Total Assets, 2003-2007

1.16

5.21

2.38

6.35

9.74

13.78

8.13

53.25

2007


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Figure 9.1 Market Shares for Types of Banking Institutions in China in Terms of Total Assets, 2003-2007 Ma r k e t s h a r e s ( %)

100%

100%

0.14 6.54 1.44 5.29

0.14 6.54 1.44 5.29

90%

80%

0.18 6.20 1.84 5.40

10.12 10.12

10.30 10.30

80%

10.71 10.71

7.69

70%

60%

0.18 6.20 1.84 5.40

7.69

1.91 5.44

0.81 6.39 1.91 5.44 9.66

9.66

11.54 11.54

7.63 7.63

60%

0.81 6.39

1.15 6.08 2.11 5.90

1.15 6.08 2.11 5.90

7.82

9.74

7.90 7.90

13.78 13.78

8.13 8.13

40% 58.07

40%

30%

6.35

12.39 12.39

Market shares (%) 50%

1.16 5.21 2.38 6.35

9.74

11.92

7.82

2.38

9.33

9.33

11.92

1.16 5.21

20%

58.07

56.91 56.91

56.06 56.06

55.15 55.15

53.25 53.25

20%

10%

0% 2003

2004

2005 Year

0% 2003

2004

2005

2006

2006

2007

2007

Ye a r

State-owned commercial banks City commercial banks

Policy banks Foreign banks

Joint-stock commercial banks Other depository institutions

Credit cooperative banks Rural commercial banks

Source: Author calculation based on information from CBRC Annual Reports, various issues.

Next, in order to further evaluate the degree of concentration of China’s banking system, market shares of the individual banks are presented based on their composition of assets, deposits, and loans out of the whole banking institutions in Tables 9.4, 9.5 and 9.6 respectively. The tables presented the top 10 banks in accordance to their market shares from year 2003 to year 2006. The percentage of market shares in terms of assets, deposits, and loans clearly showed that the Four Big state-owned banks had been dominating the banking institutions between year 2003 and 2007. Industrial and Commercial Bank of China (ICBC), the number one state-owned commercial banks in China seems to gain a significant market shares in terms of assets, deposits,


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Ranking

1

2

3

4

5

6


CMB 2.59

2.61

2.17

2.18 CITIC Group

ADBC

2.17

2.31 CMB

CITIC Group

2.19

2.38 ADBC

CITIC Group

2.16

2.66 ADBC

CITIC Group

8

ADBC

7

1.61

China CITIC

1.57

China CITIC

1.43

CEB

10

2.11

ADBC

2.16

2.00

China CITIC

1.69

CITIC Group China CITIC

1.99

CMB

1.86

CMB

1.79

CMB

9

Notes: ICBC – Industrial & Commercial Bank of China (The), BOC – Bank of China Limited, ABC – Agricultural Bank of China, CCBC – China Construction Bank Corporation, CDC – China Development Bank Corporation, Bcom – Bank of Communications Co. Ltd, ADBC – Agricultural Development Bank of China, CMB – China Merchants Bank Co Ltd, CITIC Group, China CITIC – China CITIC Bank Corporation Limited, CEB – China Everbright Bank Co Ltd. Source: Author calculation based on information from Bankscope database.

2007 Bank ICBC CCBC BOC ABC CDC Bcom % out of Total Assets 17.18 13.05 11.85 10.49 5.73 4.17

2006 Bank ICBC CCBC ABC BOC CDC Bcom % out of Total Assets 17.50 12.70 12.50 12.42 5.39 4.01

2005 Bank ICBC ABC BOC CCBC CDC Bcom % out of Total Assets 17.51 12.94 12.85 12.44 5.15 3.86

2004 Bank ICBC BOC ABC CCBC CDC Bcom % out of Total Assets 16.00 13.54 12.74 12.41 5.00 3.63

2003 Bank ICBC BOC CCBC ABC CDC Bcom % out of Total Assets 16.52 14.41 12.90 12.67 4.64 3.36

Year

Table 9.4 China: Top 10 Banks in Terms of Total Assets, 2003-2007 (% of Market Shares) 154 ♦ Chan Sok Gee

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Ranking

1

2

3

4

5

6

2.30

CMB

2.17

10

1.71

1.60

China Everbright Shanghai Pudong

9

1.88

1.68

2.15

1.89

1.86

CITIC Group China CITIC Bank Shanghai Pudong

2.16

CITIC Group China CITIC Bank Shanghai Pudong

2.13

2.14 CMB

CITIC Group

8

CMB

7

2.17

2.13

Shanghai Pudong China Minsheng

Notes: ICBC – Industrial & Commercial Bank of China (The), BOC – Bank of China Limited, ABC – Agricultural Bank of China, CCBC – China Construction Bank Corporation, Bcom – Bank of Communications Co. Ltd, ADBC – Agricultural Development Bank of China, CMB – China Merchants Bank Co Ltd, CITIC Group, China CITIC – China CITIC Bank Corporation Limited, China Minsheng – China Minsheng Banking Corporation, Shanghai Pudong – Shanghai Pudong Development Bank. Source: Author calculation based on information from Bankscope database.

2007 Bank ICBC CCBC ABC BOC Bcom CMB CITIC Group China CITIC % out of Total Deposits 20.52 15.58 15.15 13.13 4.91 3.14 2.59 2.34

2006 Bank ICBC ABC CCBC BOC Bcom CMB CITIC Group China Minsheng China CITIC Bank Shanghai Pudong % out of Total Deposits 20.04 15.18 14.64 13.11 4.67 2.51 2.17 1.99 1.93 1.87

2005 Bank ICBC ABC CCBC BOC Bcom ADBC % out of Total Deposits 20.33 14.93 14.13 13.80 4.42 2.37

2004 Bank ICBC BOC ABC CCBC Bcom ADBC % out of Total Deposits 21.55 14.64 14.48 14.30 4.19 2.72

2003 Bank ICBC BOC CCBC ABC Bcom ADBC % out of Total Deposits 22.65 15.46 15.09 14.36 4.08 3.24

Year

Table 9.5 China: Top 10 Banks in Terms of Total Deposits, 2003-2007 (% of Market Shares)


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Ranking

1

2

3

4

5

6


ADBC 3.79

4.07

3.76

3.91 Bcom

ADBC

4.44

4.62 Bcom

ADBC

2.45

CMB

2.41

CMB

2.84

CMB

1.93

3.36

Bcom

CMB

1.77

3.05 Bcom

CMB

8

Bcom

7

2.41

CITIC Group

2.20

CITIC Group

2.59

CITIC Group

1.79

CITIC Group

1.73

CITIC Group

9

2.13

China CITIC

2.02

China Minsheng

2.38

China Minsheng

1.61

Shanghai Pudong

1.47

Shanghai Pudong

10

Notes: ICBC – Industrial & Commercial Bank of China (The), BOC – Bank of China Limited, ABC – Agricultural Bank of China, CCBC – China Construction Bank Corporation, Bcom – Bank of Communications Co. Ltd, ADBC – Agricultural Development Bank of China, CMB – China Merchants Bank Co Ltd, CITIC Group, China CITIC – China CITIC Bank Corporation Limited, China Minsheng – China Minsheng Banking Corporation, Shanghai Pudong – Shanghai Pudong Development Bank. Source: Author calculation based on information from Bankscope database.

2007 Bank ICBC CCBC BOC ABC CDC % out of Total Loans 14.82 11.92 10.32 10.15 8.39

2006 Bank ICBC ABC CCBC BOC CDC % out of Total Loans 15.19 13.41 12.02 10.05 8.54

2005 Bank ICBC ABC CCBC BOC CDC % out of Total Loans 17.94 15.83 14.20 11.87 10.09

2004 Bank ICBC ABC CCBC BOC CDC ADBC % out of Total Loans 16.54 13.60 11.56 11.02 7.36 3.79

2003 Bank ICBC ABC CCBC BOC CDC ADBC % out of Total Loans 16.34 13.23 11.48 11.35 6.60 4.04

Year

Table 9.6 China: Top 10 Banks in Terms of Total Loans, 2003-2007 (% of Market Shares) 156 ♦ Chan Sok Gee

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and loans over the years. It is clearly highlighted that ICBC gains more than 16 per cent and above of the market shares in terms of total assets and total loans whereas more than 20 per cent in terms of total deposits of the whole banking system. This is then followed by the Bank of China (BOC), China Construction Bank of China (CCBC), and Agricultural Bank of China (ABC) as being presented in Tables 9.4, 9.5, and 9.6 respectively. Nevertheless, there was a gradual reduction in the market shares of the Four Big state-owned commercial banks especially in terms of total deposits and total loans between year 2003 and year 2007. ICBC experienced a reduction of market shares in total deposits from 22.65 per cent in year 2003 to 20.52 per cent in year 2007, as well as a reduction of market shares in terms of total loans from 16.34 per cent in year 2003 to 14.82 per cent in year 2007. Similar incident also happened to the other three big state-owned commercial banks. In addition to that, other commercial banks in China seem to gain the momentum in gaining the market shares from the market. It can be seen that commercial banks such as CITIC group, China CITIC Bank Corporation Limited (China CITIC), China Minsheng Banking Corporation (China Minsheng), and Shanghai Pudong Development Bank (Shanghai Pudong) started to exhibit an increased in market shares in terms of assets, deposits, and loans since year 2003 to 2007. This is especially true to CITIC group where it can be seen that they are being ranked as the number eight bank in terms of total deposits and number 9 in terms of total loans in accordance to Tables 9.5 and 9.6 respectively. This showed that the policy reform China seems to be effective however, a longer time span is needed to create a more healthy competition in the banking industry in the future. Besides that, the authorities should also further liberalized the banking sectors in order to create more incentive for the foreign counterparts to participate in the domestic banking industry so that they can served as a benchmark to the local banks to increase their efficiency level through healthy competition with the foreign banks. The authority should also further reduce their influences in the state-owned commercial banks as well as the policy banks. This is vital in order for the commercial banking industry so that the banks will be able to operate more cost and profit efficient through intense competitions rather than under the protection of the banking authorities. Hence, the reform should be done by further privatization of the state-owned commercial banks or perhaps injection in of the foreign capital into the state-owned commercial banks so that these banks could take advantage in terms of management skills and technology advancement from the foreign counterparts.


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References Barth, J. R., R. Koepp and Z. Zhou (2004), “Banking Reform in China: Catalyzing the Nation’s Financial Future”, available at SSRN: http://ssrn.com/abstract=548405 or DOI: 10.2139/ssrn.548405 (retrieved: 19th May 2009). Berger, A.N., I. Hasan and M. Zhou (2009), “Bank Ownership and Efficiency in China: What Will Happen in the World’s Largest Nation?”, Journal of Banking & Finance, 33(1), pp. 113-130. Chen, X., M. Skully and K. Brown (2005), “Banking Efficiency in China: Application of DEA to Pre- and Post-Deregulation Eras: 1993-2000”, China Economic Review, 16(3), pp. 229-245. China Banking Regulatory Commission (CBRC), China Banking Regulatory Commission Annual Report, various issues. Holmes et al. (2009), 2009 Index of Economic Freedom, Washington D.C.: The Heritage Foundation. The Wall Street Journal, p. 435. Leung, M.K. and V.W.K. Mok (2000), “Commercialization of Banks in China: Institutional Changes and Effects on Listed Enterprises”, Journal of Contemporary China, 9(3), pp. 41-52. Leung, M.K., D. Rigby and T. Young (2003), “Entry of Foreign Banks in the People’s Republic of China: A Survival Analysis”, Applied Economics, 35(1), pp. 21-31. Li, S., F. Liu, S. Liu and G.A. Whitmore (2001), “Comparative Performance of Chinese Commercial Banks: Analysis, Findings and Policy Implications”, Review of Quantitative Finance and Accounting, 16(2), pp. 149-170. Mo, Y. (1999), “A Review of Recent Banking Reforms in China”, BIS Policy Papers 7 – Strengthening the Banking System in China: Issues and Experience. The People’s Bank of China (PBOC) (2007), China Financial Stability Report 2007, China Financial Publishing House. Wong, R. and S. Wong (2001), “Competition in China s Domestic Banking Industry”, Cato Journal, 21, pp. 19-41. Zdenek, K. (2007), “Banking Reform in China: Driven by International Standards and Chinese Specifics”, TIGER Working Paper No. 109, available at SSRN: http://ssrn. com/abstract=1026854 (retrieved: 19th May 2009).


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Western Development in China ♦ 159

Chapter 10 Western Development in China: The Road to Sustainable Economic Growth Joanne Hoi-Lee Loh

Introduction Since the launching of the market reform policies in the late 1970s, China experienced rapid economic growth. Each region gains an encouraging economic and social development. The eastern region in China develops at a rapid rate as it has a stronger economic foundation and better geographical location. Besides the above mentioned factor, preferential government policies and well-developed infrastructures also contribute to the rapid economic growth in eastern China. Due to historical and geographical factors, the development in western China is slower than the development of eastern region. Hence, a huge gap exists between these two regions and it will become even larger if the Chinese government does not take the effort to minimize it. In order to minimize the disparity, top Chinese leader Jiang Zeming put forward the guidelines for accelerating the development of western China on June 17, 1999, stressing that a coordinated development between the population, resources, environment, and economy and society should be achieved by steps through inputs of domestic and overseas capital as well as technical personnel (China Statistical Yearbook, 2002). The economic development in western China is accelerated after the implementation of the “Develop the West” programme for eight years. Basic infrastructures are well-developed, intra-region and inter-region poverty has been reduced and the collaboration between the eastern region and the western region has been improved. This significant cooperation between these two regions and ample foreign capital inflow will lead to a sustainable economic growth in China. Hence in this chapter, the effectiveness of the “Develop The West” programme which has been initiated since the early 21st century would be examined in detail. Can the development of the western region bring about a sustainable economic growth to China? According to the Western China 159


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160 ♦ Joanne Hoi-Lee Loh

Development Report (2008), with continuous support and aid from the central government, the “Develop the West” programme still has a long way to proceed. Although some obstacles and conflicts may happen along the programme, the Chinese government still persists with their initial mission to help and develop the western region in order to achieve rapid economic growth in the long run. Background of Western Region in China The western region consists of 6 provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan and Yunnan), 5 autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet and Xinjiang) and 1 municipality (Chongqing). The western region of China is home to one-third of the country’s administrative provinces and autonomous regions. It covers an area of 5.4 million square meters and has a combined population of over 280 million, making up 56 per cent and 23 per cent of the national total respectively. The western region is used to be described as “barren, remote, poor, large, valuable and beautiful” and most of the populations are minorities especially in Xinjiang and Tibet (Goodman, 2004). Besides that, the western region is rich of a variety of natural resources such as petroleum, natural gas, coal, iron, magnesia, copper, zinc and others. Figure 10.1 Sketch of Western China


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Apart from the above minerals, the water resource in western China is about 82.5 per cent of the total water resources in China (Western China Development Report, 2008). In addition, the western region has great potential in tourism as most of the famous tourist spots in China such as, Jiuzhaigou Valley (九寨沟) in Sichuan, Mogao Caves (莫高窑) or Caves of the Thousand Buddhas in Gansu, the Terracotta Army (秦兵马俑) in Shaanxi and the Potala Palace (布达拉宫) in Tibet are concentrated in the western region. “Develop the West” Programme (西部大开发) The “Open up the West” Programme was initiated in January 2000 by the Leadership Group of Western China Development (西部地区开发领导小组) which was led by Premier Zhu Rongji (Goodman, 2004). The main objectives of this programme are: i. to develop the infrastructure in transportation, telecommunications and energy usage ii. to increase the level of foreign investment to this region iii. to increase the effort on ecological protection iv. to promote a better education and; v. to reduce the poverty rate in order to narrow the gap between eastern region and western region. (Western China Development Report, 2008)

100 million yuan

Figure 10.2 Gross Regional Product in Western China, 2006 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

Source: Western China Development Report, 2008, Table 9-2-1.


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Figure 10.2 exhibits the gross regional product of each province/ autonomous region/municipality in the western region in 2006. Sichuan has the highest gross regional product of 863,781 million yuan in 2006. On the other hand, Tibet is found to have the lowest gross regional product of 29,101 million yuan in the same year. The data shows that the Chinese government needs to exert more efforts to ensure the equal growth of every province in this region. With the launching of “Develop the West” programme, the gross regional product in the western region has grown from 1,873,500 million yuan in 2001 to 3,952,700 million yuan in 2006 while the per capita gross regional product has increased from 5,183 yuan in 2001 to 10,959 yuan in 2006. However, the gross regional product in western China is only 17.1 per cent of the nation’s gross domestic product in 2006 (China Statistical Yearbook for Regional Economy, 2007). Besides that, the revenue of local government in western region has increased from 130,070 million yuan in 2001 to 305,900 million yuan in 2006 while the total investment in fixed assets is brought up to 2,199,700 million yuan in 2006 and the increment is about triple as compared to 715,900 million yuan in 2001 (Western China Development Report, 2008). Issue of Poverty in China Due to the huge gap between the eastern region and the western region in China, an issue which has gained serious concern is the poverty rate in western China. According to Yeoh (2008), the distribution of China’s rural poverty is concentrated in the western region. For instance, the poverty rate at Inner Mongolia, Yunnan, Shaanxi, Gansu, Ningxia and Xinjiang is between 5 to 10 per cent. The poverty rate in Guizhou, Tibet and Qinghai at more than 10 per cent is even worse. Figure 10.3 shows the distribution of absolute poverty population in countryside by region in 2006. The distribution of absolute poverty is divided into four main categories which are eastern region, central region, north eastern region and western region in China by 2006. Almost 64 per cent of the absolute poverty population comes from the western region, followed by 26 per cent from the central region. However, only 5 per cent of the eastern and north eastern region population falls under the absolute poverty category. Thus, the absolute poverty rate is comparatively higher in the western region. Hence, a low per capita income may become one of the main contributors to the high poverty rate. The per capita annual disposable income of urban households is 14,967 yuan and 9,728 yuan in eastern region and western region


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Figure 10.3 China: Distribution of Absolute Poverty Population in Countryside by Region, 2006 North Eastern 5%

Eastern 5% Middle 26%

Western 64%

Source: Western China Development Report, 2008, Chart 7-1.

respectively. As we compare with the per capita net income of rural residents, it is 5,188 yuan and 2,588 yuan in eastern region and western region respectively (Western China Development Report, 2008). The data shows us that the great income gap will cause an imbalance living standard in the two regions. The low per capita income can be explained through the table below. Table 10.1 Industrial Composition in Western China, 2006 (percentage) Region Inner Mongolia Guangxi Chongqing Sichuan Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang

Primary Sector

Secondary Sector

Tertiary Sector

53.8 56.2 45.3 50.6 57.4 69.4 61.5 50.8 57.2 49.1 48.4 53.3

15.6 11.2 21.5 18.4 10.3 10.0 9.2 18.5 13.7 17.4 22.3 13.3

30.6 32.6 33.2 31.0 32.3 20.6 29.3 30.7 29.1 33.5 29.3 33.4

Source: Western China Development Report, 2008, Table 9-4-2.


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From Table 10.1, it can be observed that more than 50 per cent of the population in the western region are involved in the primary sector. Most of the population in western region work in agriculture, agribusiness, fishing, forestry and mining sectors. Due to the availability of rich natural resources and arable land in the western region, the primary sector takes up the biggest proportion of industrial composition. The land area in the eastern region is about 916,000 km2 while the land area in the western region is about 6,867,000 km2 (China Statistical Yearbook for Regional Economy, 2007). On the other hand, most of the population in the eastern region are involved in the tertiary sector. In Beijing and Shanghai respectively, 69 per cent and 54 per cent of the population are involved in the tertiary sector (China Statistical Yearbook for Regional Economy, 2007, p. 33). Hence, the income per capita for western region, especially the rural areas is comparatively low because the wages in primary sector is lower and less stable as compared to the tertiary sector. Well-off Society Construction in Western China Although the poverty rate is still considerably high in the western region, the construction of a well-off society (xiaokang 小康) in the western countryside has gained momentum since the implementation of the “Develop the West” programme. A well-off society refers to a society with good economic growth and a satisfactory standard of living. The criteria which are taken into account include consistent economic growth, well-developed infrastructure and telecommunication services, good education system and clean environment. Table 10.2 shows the percentage of well-off society in the eastern, central and western region in China from 2002 to 2006. Table 10.2 China: Percentage of Well-off (Xiaokang) Society by Region, 2002-2006 Year

Total Eastern Region Central Region Western Region

2002 2003 2004 2005 2006

12.5 16.9 21.6 28.2 34.9

30.8 35.6 40.5 47.6 54.7

9.8 13.8 18.3 24.6 31.0

-14.1 -9.7 -5.1 1.3 7.8

Average Growth

5.6

5.975

5.3

5.475

Source: Western China Development Report, 2008, p. 303.


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Table 10.2 shows that a huge gap exists between the well-off society composition in the eastern, central and western regions. In 2006, about 55 per cent of society in the eastern region is well-off. This means that the eastern region has almost completed half of the journey towards a well-off society construction. On the other hand, about 31 per cent of society in the central region is well-off. This means that the central region has gone through almost one third of the journey. However, in the western region, only 7.8 per cent of society is well-off. This shows that the construction of a well-off society in the western region is only at the initial stage and there is still a long journey for the western region to achieve the well-off society target. Although the percentage of society which is well-off in the western region is comparatively lower, it is growing at a faster rate (6.5 per cent) compared to the central region. This is a good indicator to show us that the “Develop the West” programme has started to slowly show its effect. The main factor which has contributed towards the abovementioned imbalance is the weak and fragile social background in the western region. The western region started off with the lowest percentage of well-off society and lags behind the central and eastern region in this respect. Although the average growth of well-off society has been dramatically fast since 2003, it still has the lowest percentage of well-off society among the three regions. The Chinese government has realized the need to develop the western region. However, there are a number of constraints in improving the percentage of well-off society in the region. First of all, the government faces the problem of improving the quality of peasants. The average education level for most of the population in western region is only 6.5 years (China Social Statistical Yearbook, 2008). The region experiences a high drop-out rate and a low school-enrolment rate for children. The main reason is the lack of awareness of the importance of education among the population in this region. Besides that, low and insufficient education funds also lead to the high drop-out rate in the region. The school enrolment rate in Yunnan, Tibet and Qinghai is below 90 per cent. (Western China Development Report, 2008) Hence, the Chinese government must invest more in education, especially for the population in the western region. The standard of living for the population in the western region can only be improved via a reform of the education system. A high literacy rate is pertinent for encouraging economic growth in the region. Apart from the problem in the education system, the low level of income is another constraint for the development of the western region. The low level of income in the western region is linked to the low literacy rate in the region. Due to illiteracy, most people in the western region are involved in


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agricultural activities. In 2005, the per capita disposable income in the western region is only 2,029 yuan, which is lower than the minimum per capita disposable income requirement of 2,200 yuan for a well-off society (China Social Statistical Yearbook, 2008). The reason is that per capita disposable income in the western region has always been low and the average disposable income growth rate has been weak. Besides that, low health-consciousness among the population and inadequate public infrastructure in the western region is another constraint. In the western region, the accessibility of medical services is limited and the quality of the services has not achieved the national standard. By 2005, the medical coverage rate in the western region is only 14 per cent (Zhongguo Weisheng Nianjian, 2007). Most patients have to pay the medical expenses with their own fund. This is a huge burden for most people in the western region. Due to the complicated geographical factor and low population density, developing the western region becomes a costly affair. Thus, development of this region only occurs gradually. Hence, the development of the western region poses a dilemma for the Chinese government. If the current situation in the western region remains unchanged and the other regions in China enjoy rapid growth, regional disparity in China will only worsen. This will cause increase dissatisfaction in the western region and possibly bring about riots in the region. As a result, the peace of the nation will be threatened and the economic growth of China will deteriorate. However, the Chinese government has shown that it has not given up the idea of developing the western region. For instance, the building of the Qinghai-Tibet railway (青藏铁路) is one of the efforts by the Chinese government in developing the western region. The total length of this railway is 1956km and it connects Xining in Qinghai to Lhasa in Tibet (Western China Development Report, 2008). The building of this railway accelerates the growth in tourism and transportation. A continuous development of the western region is needed. If the poverty rate can be reduced and the per capita income of the western region can be increased, the standard of living in the western region would improve. Concluding Remarks The “Develop the West” programme is not a “mission impossible” for the Chinese government. However, this programme will need time to succeed. Although there are already some significant developments in the western region, the “Develop the West” programme is still a long-term task for the Chinese government. The Chinese government has implemented a number of


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policies to accelerate the development of the western region. To encourage the development of the western region, the Chinese government has continuously stabilized and enhanced the Huinong policy (惠农政策). The Chinese government has also reduced the operating cost and increased the income of peasants to improve their standard of living. Besides that, recruiting knowledgeable human resources is another important policy to develop the western region. The Western region will be able to go further if it has ample k-workers in hand. Knowledgeable human resources will boost the region’s economy through various innovations. Last but not least, the development of transportation, education, culture and healthcare is also important for the growth of the western region. If all of these policies can be implemented successfully, the gap between the western and other regions can be bridged. With continuous growth in the western region, sustainable growth in China can then be achieved. References Goodman, David S.G. (2004), “The Emergence of the Campaign to Open Up the West: Ideological Formation”, in David S.G. Goodman (ed.), China’s Campaign to “Open Up the West”: National, Provincial and Local Perspectives (The China Quarterly Special Issues No. 5), Cambridge University Press. Department of Comprehensive Statistics of National Bureau of Statistics (2007), China Statistical Yearbook for Regional Economy, China Statistical Press, NBS. Department of Social, Science and Technology Statistics (2008), China Social Statistical Yearbook, China Statistical Press, NBS. National Bureau of Statistics, China (2002), China Statistical Yearbook, China Statistical Press, NBS. Yeoh, Emile Kok-Kheng (2008), “Disparity in China: Poverty, Inequality and Interregional Imbalance”, in Emile Kok-Kheng Yeoh (ed.), Facets of a Transforming China: Resource, Trade and Equity, Kuala Lumpur: Institute of China Studies, University of Malaya. 》中国卫生出版社. “中国卫生年鉴” 编辑委员会 (2007),《中国卫生年鉴 , “中国西部国际博览会” 组委会办公室等单位 (2008),《中国西部发展报告》 (Western China Development Report, 2008), 中国统计出版社.


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168 ♦ Emile Kok-Kheng Yeoh, Lionel Wei-Li Liong and Susie Yieng-Ping Ling

Chapter 11 Fiscal Reform and Dimensions of Decentralization: Some Observations on China Emile Kok-Kheng Yeoh, Lionel Wei-Li Liong and Susie Yieng-Ping Ling

Introduction The analyses on spatial dimension of politics in terms of decentralization in China have so far invariably utilized the typology of administrative versus economic decentralization.1 This preference is not difficult to understand given the fact that the core dimension of such decentralization – that of political power – has the problem of applicability in the light of the centralism of the present political power configuration. The following comment by a former Chinese vice-premier, cited in Li (2003: 1), reflects the reformers’ feeling towards the lessons of the multiple cycles of administrative decentralization and recentralization in China: “A [more] important and fundamental lesson of the [1958] attempt to improve the economic management system is: We only saw the vices of overcentralization of power, and sought to remedy the situation by decentralizing powers to the lower levels. When we felt too much power had been decentralized, we recentralized them. We did not then recognize the inadequacies of putting sole emphasis on central planning (and in particular a system dominated by mandatory planning) and totally neglecting and denying the role of the market […] As a result over a long period of time (after the 1958 decentralization) we were trapped within the planned economy model. Adjustments and improvements could only work around the cycles of decentralization and recentralization. Moreover the recipients of more powers are invariably the local governments, rather than enterprises.”2 Political realities aside, the measurement of the degree of decentralization also suffers from the fact that it is very difficult to get complete information on government revenues and expenditures as the budget is incomplete and many government revenues and expenditures are not included in the budget and hence reliable figures for overall government revenues and expenditures are never available (Yeoh, 2009: 241). 168


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Fiscal Reform and Dimensions of Decentralization ♦ 169

The Administrative Dimension: Subnational Autonomy The 2008 central and local budget implementation report and 2009 central and local budget draft3 presented on the 11th National People’s Congress, second meeting, on 5th March 2009 reported for year 2008 a national total revenue of 6.13169 trillion yuan4, comprising central revenue of 3.267199 trillion yuan and local revenue of 2.864491 trillion yuan. From the perspective of fiscal IGR (intergovernmental relations), for year 2008, central-to-local tax revenue rebate and transfers amounted to 2.294561 trillion yuan – with an increase of 26.5 per cent over the previous year – comprising central-to-local tax revenue rebate of 0.428219 trillion yuan (with an increase of 3.9 per cent over the previous year), financial (including general) transfers of 0.869649 trillion yuan (with increase of 22 per cent), earmarked transfers of 0.996693 trillion yuan (with a substantial increase of 44.6 per cent mainly due to the increase in subsidizing local education, healthcare and other major development items). Central-to-local tax revenue rebate and transfers thus form local revenue and spent by local arrangement. An average 38 per cent of local government expenditure was funded by central government transfers, and in the case of the central and western regions an average 54.4 per cent of local government expenditure was funded by such central government transfers. On the part of local government finance, revenue totaled 5.159052 trillion yuan – an increase of 23.7 per cent over the previous year – comprising a) local own revenue of 2.864491 trillion yuan and b) central-to-local tax revenue rebate and transfers totaling 2.294561 trillion yuan. Placed within the framework of the trichotomy of fiscal, administrative and political dimensions of decentralization (see, for example, UNDP, 2002, and Schneider, 2003), the above figures could show the extent of decentralization, in particular in the administrative dimension. Schneider (2003: 33) hypothesizes three core dimensions of the decentralization concept: Fiscal decentralization refers to how much central governments cede fiscal impact to non-central government entities. Administrative decentralization refers to how much autonomy non-central government entities possess relative to central control. Finally, political decentralization refers to the degree to which central governments allow noncentral government entities to undertake the political functions of governance, such as representation.

One of the ways to gauge the degree of administrative decentralization or “local administrative autonomy” is by examining the control exercised over local revenue:


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180

Central-to-local tax revenue rebate and transfers Expenditure from central government budget stabilization adjustment fund

Central government deficit

Local government-level expenditure Local fiscal balance

Local government-level revenue

Central-to-local tax revenue rebate and transfers

2864.491

93.993

159.787

Local-to-centre remittance

4905.272

Local Government Expenditure 4999.265 billion yuan and Fiscal Balance 159.787 billion yuan

Source: Data for Figures 11.1 and 11.2 from 关于 2008 年中央和地方预算执行情况与 2009 年中央和地方预算草案的报告.htm .

2294.561

Local Government Revenue 5159.052 billion yuan

Figure 11.2 China: Local Governments’ Fiscal Balance, 2008 (billion yuan)

Central government-level expenditure

2294.561

1337.431

Central government budget stabilization adjustment fund

3267.199

19.2

Central Government Expenditure 3651.192 billion yuan

Local-to-centre remittance revenue

Central government-level revenue

93.993

110

Central Government Revenue 3741.192 billion yuan and Deficit 180 billion yuan

Figure 11.1 China: Central Government’s Fiscal Balance, 2008 (billion yuan) 170 ♦ Emile Kok-Kheng Yeoh, Lionel Wei-Li Liong and Susie Yieng-Ping Ling

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The percentage of local revenues from taxes provides an indicator of the degree of subnational control over resources. Taxes are different from the total amount of resources, which is more a measure of wealth rather than control […] subnational revenues are a combination of taxes, transfers, grants, and loans. Taxes offer the greatest degree of autonomy, grants, and loans offer somewhat less, and discretionary transfers probably the least. Transfers, even supposedly automatic ones, can be withheld, and grants and loans generally arrive with conditions or with expenditures earmarked. (ibid.: 38-39)

Besides this, according to Schneider, subnational autonomy can also be measured by looking at the percentage of total grants and revenues not accounted for by transfers, which […] could conceivably include taxes, loans, fees, sales of assets, or informal contributions. There are some drawbacks to excluding all transfers, which do not distinguish for example between transfers over which lower levels of government have total control, such as block grants, and transfers that are tied to central government priorities, such as earmarked transfers, or transfers that require certain behaviors by subnational governments, such as matching or fiscal balance. Still, the treatment of all revenues aside from transfers gives an indication of the degree to which subnational governments raise their own funds through taxes, loans, fees, or sales of assets. (ibid.: 39)

Figures from the above report for 2008 show a central-to-local tax revenue rebate to all transfer ratio of 0.428 : 1.866 or the former as about 23 per cent of the latter amount. On the other hand, non-earmarked transfers were 46.6 per cent of total transfers. Table 11.1 China: Central Government Expenditure, 2008 and 2009 (billion yuan) 2008 2009 2009 Estimate Item (Actual) (Estimate) as % of 2008 Actual General Public Service including: Central government-level expenditure Transfer payments to local governments

121.665 106.015 15.650

131.361 101.386 29.975

108.0 95.6 191.5

Foreign Affairs including: Central government-level expenditure Transfer payments to local governments

23.924 23.916 0.008

26.893 26.893

112.4 112.4


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Table 11.1 (continued) 2008 2009 2009 Estimate Item (Actual) (Estimate) as % of 2008 Actual Defense including: Central government-level expenditure Transfer payments to local governments

410.141 410.093 0.048

472.867 472.251 0.616

115.3 115.2 1283.3

Public Security including: Central government-level expenditure Transfer payments to local governments

87.577 64.862 22.715

116.131 73.26 42.871

132.6 112.9 188.7

Education including: Central government-level expenditure Transfer payments to local governments

159.854 49.165 110.689

198.062 62.327 135.735

123.9 126.8 122.6

Science and Technology including: Central government-level expenditure Transfer payments to local governments

116.329 107.741 8.588

146.103 142.824 3.279

125.6 132.6 38.2

Culture, Sport and Media including: Central government-level expenditure Transfer payments to local governments

25.281 14.061 11.22

27.975 14.228 13.747

110.7 101.19 122.5

Social Security and Employment including: Central government-level expenditure Transfer payments to local governments

274.359 34.428 239.931

335.069 30.048 305.021

122.1 87.3 127.1

Low-income Housing including: Central government-level expenditure Transfer payments to local governments

18.19 0.711 17.479

49.301 3.138 46.163

271 441.4 264.1

Healthcare and Hygiene including: Central government-level expenditure Transfer payments to local governments

85.445 5.396 80.049

118.056 5.628 112.428

138.2 104.3 140.4

Environmental Protection including: Central government-level expenditure Transfer payments to local governments

104.03 6.621 97.409

123.662 3.735 119.927

118.9 56.4 123.1

Township and Village Community Affairs including: Central government-level expenditure Transfer payments to local governments

6.316 0.722 5.594

0.395 0.365 0.03

6.3 50.6 0.5

270.22 31.439

344.659 30.34

127.5 96.5

Agriculture, Forestry and Water including: Central government-level expenditure


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Table 11.1 (continued) 2008 2009 2009 Estimate Item (Actual) (Estimate) as % of 2008 Actual

Transfer payments to local governments

238.781

314.319

131.6

Transport including: Central government-level expenditure Transfer payments to local governments

160.029 103.759 56.27

188.72 93.475 95.245

117.9 90.1 169.3

Extraction, Electricity and Information, etc. including: Central government-level expenditure Transfer payments to local governments

60.076 45.596 14.48

75.75 48.936 26.814

126.1 107.3 185.2

Food, Oil, Material Reserve, etc. including: Central government-level expenditure Transfer payments to local governments

110.51 60.063 50.447

178.045 83.843 94.202

161.1 139.6 186.7

Financial Affairs including: Central government-level expenditure Transfer payments to local governments

97.551 97.551

31.558 31.558

32.4 32.4

Expenditure for Recovery and Reconstruction after Earthquake including: Central government-level expenditure Transfer payments to local governments

60

97

161.7

6.246 53.754

13.061 83.939

209.1 156.2

127.869 127.869

137.185 137.185

107.3 107.3

Expenditure for Interest Payment on National Debt including: Central government-level expenditure Transfer payments to local governments Contingency Other Expenditures including: Central government-level expenditure Transfer payments to local governments

40 56.694 41.177 15.517

168.839 83.119 85.72

297.8 201.9 552.4

Tax Revenue Rebate to Local Governments

334.226

493.419

147.6

General Transfer Payments to Local Governments

827.713

885.45

107

3538

4386.5

124

Central Government Expenditure

Central Budget Stabilization Adjustment Fund 19.2 Source: http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengshuju/200903/t20090319_124155. html


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1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

559.487

968.148

Sub-total Revenue of Local Governments

Total Revenue of Local Governments

780.33

600.195

851.5

735.177

984.998 1189.337 1510.076 1830.358 2356.504 2864.491

826.141 1040.796 1148.402 1350.145 1811.245 2294.561

1107.137 1380.525 1586.677 1811.139 2230.133 2658.478 3180.503 4167.749 5159.052

640.606

466.531

Sources: Zhongguo Caizheng Nianjian 中国财政年鉴, various years; http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengshuju/200807/t20080728_59019.html; http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengxinwen/200903/t20090316_122544.html

408.661

428.219

B) Central-to-Local Governments’ Tax Revenue Rebate

Central-to-Local Governments’ Tax Revenue Rebate and Transfers (A+B)

996.693

2) Earmarked Transfers

869.649

1) General Transfers

A) Central-to-Local 1866.342 Governments’ Transfer Payments

Table 11.2 China: Transfers from Central Government and Sub-total Revenue (i.e. Revenue which Are Not Transfers from Central Government) of Local Governments, 1999-2008, and General and Earmarked Transfers and Tax Revenue Rebate, 2008 (billion yuan) 174 ♦ Emile Kok-Kheng Yeoh, Lionel Wei-Li Liong and Susie Yieng-Ping Ling

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Figure 11.3 China: Central-to-Local Governments’ Earmarked Transfers and Other Local Government Revenues, 2008 19% 81%

E armarked trans fers (996.69 billion yuan)

O ther loc al revenues (inc luding general trans fers , c entral-to-loc al government tax rebate and loc al governments ’ own revenues ) (4162.4 billion yuan)

Source: Data from http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengxinwen/ 200903/t20090316_122544.html Figure 11.4 China: Transfers from Central Government and Sub-total Revenue (i.e. Revenue which Are Not Transfers from Central Government) of Local Governments, 1999-2008

yua n (100 m illion) 35,000.00

28,644.91

30,000.00

23,565.04

25,000.00

22,945.61 18,303.58

20,000.00

18,112.45 15,100.76 15,000.00 13,501.45

11,893.37 10,000.00 5,594.87 5,000.00 4,086.61

6,406.06

7,803.30

8,515.00

7,351.77

4,665.31

11,484.02

9,849.98

10,407.96

Trans fers from C entral G overnment

8,261.41

6,001.95 S ub-total R evenue of L oc al L evel G overnment

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Ye a r

Sources: Data from Zhongguo Caizheng Nianjian 中国财政年鉴, various years; http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengshuju/200807/ t20080728_59019.html; http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengxinwen/200903/ t20090316_122544.html


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Figure 11.3 shows a comparison of earmarked transfers and other local revenues including general transfers, central-to-local tax revenue rebate and local governments’ own revenue. It could be seen that for year 2008 local revenues which are not earmarked transfers constituted 81 per cent of total local revenues. From the time-series perspective, it can be seen in Figures 11.4 and 11.5 that from 1999 to 2008 local government revenues which were not transfers from the central government always constituted slightly above half of the total local government revenues. Figure 11.5 China: Transfers from Central Government and Sub-total Revenue (i.e. Revenue which Are Not Transfers from Central Government) as Percentages of Total Revenue of Local Governments, 1999-2008

P ercentage 100%

80%

42.21

42.14

43.48

46.33

45.61

46.67

43.20

42.45

43.46

44.48

60%

Trans fers from C entral Government as a percentage of Total R evenue S ub-total R evenue as a percentage of Total R evenue

40% 57.79

57.86

56.52

53.67

54.39

53.33

56.80

57.55

56.54

55.52

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

20%

0% Year

Sources: D ata from Zhongguo Caizheng Nianjian 中国财政年鉴, various years; http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengshuju/200807/ t20080728_59019.html; http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengxinwen/200903/ t20090316_122544.html


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Table 11.3 China: Central-to-Local Governments’ Transfer Payments and Tax Revenue Rebate, 2008-2009 (billion yuan) 2008 2009 2009 Estimate Item (Actual) (Estimate) as % of 2008 Actual

1866.342 2395.481 I. Central-to-Local Governments’ Transfer Payments (1) General Transfers 869.649 1137.493 1. Equalization transfers 351.052 391.8 2. Nationality areas transfers 27.579 28 3. Basic fiscal security subsidy for 43.818 55 counties and villages 4. Wage adjustment transfers 239.23 236.563 5. Transfers for rural tax and fee reform 76.254 77.022 6. Fiscal transfers for urban resource depletion 2.5 5 7. Fixed-amount subsidies 13.614 13.814 (original institutional subsidies) 8. Enterprise unit subsidies 33.5 34.8 9. Fiscal balance subsidies 35.466 34.451 10. Transfers for industrial and commercial 4.7 8 departments after abolition of “two fees” 11. Village-Level Social Welfare “One-Event- 1 One-Suggestion” Award Fund 12. General Public Service Transfers 4.5 13. Public Security Transfers 33.29 14. Education transfers 41.936 90.849 15. Social Security and Employment Transfers 123.404 (2) Earmarked Transfers 996.693 1257.988 Including: Education 68.753 44.886 Science and technology 8.588 3.279 Social security and employment 239.931 181.617 Healthcare and hygiene 80.049 112.428 Environmental protection 97.409 119.927 Agriculture, forestry and water 238.781 314.319 II. Central-to-Local Governments’ 334.226 493.419 Tax Revenue Rebate Rebate of “Two Taxes” 337.2 347.6 Income Tax Base Return 91.019 91.019 Product and Oil Price and Tax-Fee Reform 153 Tax Revenue Rebate Revenue from submitting of local government -93.993 -98.2 Central-to-Local Governments’ Tax Revenue 2200.568 2888.9 Rebate and Transfer Payments

128.4 130.8 111.6 101.5 125.5 98.9 101 200 101.5 103.9 97.1 170.2

216.6 126.2 65.3 38.2 75.7 140.4 123.1 131.6 147.6 103.1 100 104.5 131.3

Source: http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengshuju/200903/t20090319_ 124155.html


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Figure 11.6 China: Central-to Local Governments’ Transfer Payments, 2008-2009 100 m illion yua n

14000 12579.88 11374.93

12000 9966.93

10000

8696.49

8000 6000 G eneral trans fers

4000

E armarked trans fers

2000 0 2008

2009 Year

Source: Data from http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengshuju/ 200903/t20090319_124155.html Figure 11.7 China: Central-to-Local Governments’ General Transfers by Item, 2008 (Actual)

3.85%

0.54% 4.08%

4.82% 40.37%

1.57% 0.29%

E qualiz ation trans fers (351.052 billion yuan) Nationality areas trans fers (27.579 billion yuan)

8.77% B as ic fis c al s ec urity s ubs idy for c ounties and villages (43.818 billion yuan) W age adjus tment trans fers (239.23 billion yuan) Trans fers for rural tax and fee reform (76.254 billion yuan) F is c al trans fers for urban res ourc e depletion (2.5 billion yuan) F ix ed-amount s ubs idies (original ins titutional s ubs idies ) (13.614 billion yuan) E nterpris e unit s ubs idies (33.5 billion yuan) F is c al balanc e s ubs idies (35.466 billion yuan) 27.51% 3.17% 5.04%

Trans fers for indus trial and c ommerc ial departments after abolition of “two fees ” (4.7 billion yuan) E duc ation trans fers (41.936 billion yuan)

Source: Data from http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengshuju/ 200903/t20090319_124155.html


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Figure 11.8 China: Central-to-Local Governments’ Earmarked Transfers by Item, 2008 (Actual)

7% 26%

1%

E duc ation (68.753 billion yuan) 24%

8% 24%

S c ienc e and tec hnology (8.588 billion yuan) S oc ial s ec urity and employment (239.931 billion yuan) Healthc are and hygiene (80.049 billion yuan) E nvironment protec tion (97.409 billion yuan) A gric ulture, fores try and water (238.781 billion yuan) O thers (263.182 billion yuan)

10%

Source: Data from http://www.mof.gov.cn/mof/zhengwuxinxi/caizhengshuju/ 200903/t20090319_124155.html

Figure 11.6 shows central-to-local transfers for year 2008 (actual) and 2009 (estimate). It can be seen that earmarked transfers are slightly larger than general transfers. Details of the general transfers by items in 2008 are shown in Figure 11.7, and details of earmarked transfers by item in 2008 are shown in Figure 11.8. Fiscal Decentralization Hypothesizing that the best indicator for the level of fiscal centralization or decentralization is the share of subnational expenditures and revenues, Schneider (2003: 36) explained that The choice of focusing on fiscal instruments rather than regulatory or financial policies is partly methodological and partly substantive. Governments use various instruments to influence the amount and distribution of wealth in society. Because regulatory instruments are built into the formal and informal institutions that govern civil society and private sector, they are extremely complex and contextspecific. Financial instruments are similarly difficult to measure with statistics, and their impact on distribution is not as direct as fiscal policy. Fiscal policy offers the best window into levels of fiscal decentralization. Decentralization of regulatory or financial mechanisms will thus have to be taken up in individual country studies.


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The degree of Chinese fiscal decentralization can be seen in Figures 11.9, 11.10 and 11.11. Figure 11.9 shows, among others, that revenue collection had been falling rapidly as the traditional tax base of the command economy eroded with the onslaught of market reform and this fiscal decline continued well into the early 1990. It was in this climate that the 1994 fiscal reform was introduced as an effort by the central government to regain control and recoup lost revenues via a new system of dual taxation (tax sharing) that redefined central government’s and regional governments’ revenues. The comprehensive reform in effect redefined the whole intergovernmental fiscal relations (fiscal IGR) by changing the structure of the main taxes, responsibilities in tax administration, revenue-sharing arrangements, and weakened the ability of the regional governments to employ surreptitious approaches for revenue mobilization. (Yeoh, 2007: 233-234) China’s proportion of local public spending in total national public spending is actually much higher than those of the major federal countries in the world. China’s local public spending has since the mid- and late 1980s been steady at about 70 per cent of her total national public spending (Figure 11.10), whereas in federal countries such as the US, Germany and Russia, the proportions of local public spending in total national public spending are only respectively 46 per cent, 40 per cent and Figure 11.9 China: Government Expenditure and Revenue as Percentages of GDP, 1990-2007 25

per cent

20 15 10 5

07

06

20

05

20

04

20

03

20

02

20

01

20

00

20

99

20

98

19

97

19

96

19

95

19

94

19

93

19

92

19

91

19

19

19

90

0

Year Expenditure

Revenue

Source: Yeoh (2009: 242), Figures 10.1 and 10.2. Computed with data from China Statistical Yearbook, various years.


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07

06

20

05

20

04

20

03

20

02

20

01

20

00

20

99

20

98

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97

19

96

19

95

19

94

19

93

19

92

19

19

19

19

91

90 80 70 60 50 40 30 20 10 0

90

per cent

Figure 11.10 China: Local Government Expenditure and Revenue Respectively as Percentages of Total Government Expenditure and Revenue, 1990-2007

Year Expenditure

Revenue

Source: Yeoh (2009: 245-246), Figures 10.4 and 10.5. Computed with data from China Statistical Yearbook, various years. Figure 11.11 China: Ratio of Local to Central Government Revenue, 1990-2007 400 350

per cent

300 250 200 150 100 50

20 07

20 06

20 05

20 03 20 04

20 02

20 01

20 00

19 99

19 98

19 97

19 96

19 94 19 95

19 93

19 92

19 91

19 90

0

Year

Source: Yeoh (2009: 245), Figure 10.3. Computed with data from China Statistical Yearbook, various years.

38 per cent (Yeoh, 2009: 246). Furthermore, the scope of China’s economic decentralization goes far beyond decentralization in public finance, but even measured solely by the latter, China had been said to be one of the world’s most economically decentralized countries.


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Postscript This chapter has presented various observations on the dimensions of decentralization in China which has been said to exhibit the rather unusual combination of high political centralism and high fiscal/economic decentralization (Yeoh, 2009: 262). Cai and Treisman (2006) noted that China’s administrative decentralization only increased considerably during the 1980s, while before that the country had been administratively and politically highly centralized, and As for appointments, from the late 1980s village officials have been locally elected. In practice, all other subnational appointments have been made by higher authorities, with the center exercising ultimate control. If fiscal decentralization means the subnational share of budget spending, this increased from about 53 percent in 1978 to 73 percent in 1996, before falling back to 70 percent in 2003. The subnational share of revenues fell from 85 percent in 1978 to 62 percent in 1985, then rose to 78 percent in 1993, before falling to 45 percent in 2003. Tax system design has remained a prerogative of the central authorities.

(Cai and Treisman, 2006: 4)

While Cai and Treisman challenged the claim that decentralization had much to do with the success of China’s reforms and its subsequent economic miracle, von Braun and Grote (2000: 15) warned that China’s approach to administrative decentralization which relies on negotiations rather than rules to define relations between the central government and the four sub-national tiers (provinces, prefectures/cities, counties and villages/townships) might over time threaten the success of the reform process.5 Table 11.4 China: Rural Poverty

Year

Rural absolute poverty Incidence of poverty

Year population+

Low-income Proportion of low-income population in rural population‡

1978

2006

250 million 30.7%

21.48 million 2.3%

2000

2006

62.13 million 6.7%

35.5 million 3.7%

+

In 2006, the rural net income per capita of nationally designated focal poverty assistant counties reached 1,928 yuan. ‡ In 2006, the rural absolute poor plus rural low-income population reached 13.7% of total rural population in the Western Region. Source: Yeoh (2009: 264), Table 10.7. Data from Fan (2008), pp. 14-19.


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Poverty Reduction

Public services / investment - priorities - efficiency / targeting

Decentralization • political • administrative • fiscal

Source: von Braun and Grote (2000: 7), Figure 1.

Accountability

Driving forces -global competition -demand for stabilization -public goods efficiency -regional political freedom

Empowerment

Participation / Empowerment Governance

[local government]

II. Economic Management

[local community]

I. Political Economy

Figure 11.12 Von Braun and Grote’s Conceptual Framework on Decentralization and Poverty Reduction


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Pursuing the second link outlined in their conceptual framework delineated in Figure 11.12 – whether public services for the poor are fostered by decentralization, and by fiscal decentralization in particular – von Braun and Grote (2000) commented that the 1994 tax reform seemed to have failed to arrest the trend towards worsening interregional inequality, as the loyalty of the local governments shifted away from the national government to the subnational level6 since taxes belonged to the central government unless specifically assigned to the localities. As the local rural governments began to impose a host of fees and levies since the higher-level governments were not able to subsidize existing services due to fiscal strain, the poorer regions hence might be victimized as they were less able to do the same (ibid.: 20), and given the still grave situation of overall Chinese poverty even after the remarkable poverty reduction achievements over the last few decades (see Table 11.4), it is indeed pertinent to include the implications on poverty reduction and interregional disparity in further research on fiscal reform and dimensions of decentralization. Notes 1. See Li (2003) which cited the 1968 work of Franz Schurmann (who called these type 2 and type 1 decentralization) and that of James Townsend and Brantly Womack (1986). 2. Bo Yibo 薄一波 (1993), Ruogan Zhongda Juece yu Shijian de Huigu 若干重大决策与事件的回顾 [Looking back at some important decisions and events], p. 804, cited in Li (2003). 3. 关于 2008 年中央和地方预算执行情况与 2009 年中央和地方预算草案的报告.htm 4. “Yuan 元” is the largest denomination of China’s currency “renminbi 人民币” (“people’s currency”, Rmb), equivalent to about US$0.146. Following the US (rather than British) convention, billion = 1000,000,000 and trillion = 1000,000,000,000. 5. Braun and Grote (2000: 15) noted that in China “the allocation of responsibilities across tiers of government remains unclear, except for health and education which are controlled by the provinces […] While administrative discretion has helped preserve the momentum for growth and reform, it has also created opportunities for corruption.” 6. As von Braun and Grote (2000: 20) noted, provincial tax officers, aiming to establish some tax autonomy, “entered into direct negotiations with enterprises for payments and transferred tax funds that would otherwise have been shared with the central government into local extra budgetary accounts.”


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References Cai, Hongbin and Daniel Treisman (2006), “Did Government Decentralization Cause China’s Economic Miracle?”, March. Li, Linda Chelan (2003), “The Nature of Central-Provincial Relations in China: A Comparative Note”, January. Schneider, Aaron (2003), “Decentralization: Conceptualization and Measurement”, Studies in Comparative International Development, Vol. 38, No. 3, Fall, pp. 3256. Schurmann, Herbert Franz (1968), Ideology and Organization in Communist China, 2nd edition, Berkeley: University of California Press. Townsend, James Roger and Brantly Womack (1986), Politics in China, 3rd edition, Boston: Little, Brown and Company. United Nations Development Program (UNDP) (2002), “Overview of Decentralisation Worldwide”, presentation at the 2nd International Conference on Decentralisation, Manila, 25th-27th July. von Braun, Joachim and Ulrike Grote (2000), “Does Decentralization Serve the Poor?”, paper presented at IMF-Conference on Fiscal Decentralization, 20th21st November 2000, Washington D.C. Yeoh, Emile Kok-Kheng (2007), “China at a Crossroads: Fiscal Decentralization, Recentralization and Politico-economic Transition”, in Emile Kok-Kheng Yeoh and Evelyn Devadason (eds), Emerging Trading Nation in an Integrating World: Global Impacts and Domestic Challenges of China’s Economic Reform, Kuala Lumpur: Institute of China Studies, University of Malaya, pp. 233-305. Yeoh, Emile Kok-Kheng (2009), “Leviathan at a Crossroads: China’s Reforms and the Pitfalls and Prospects of Decentralization”, in Emile Kok-Kheng Yeoh (ed.), Regional Political Economy of China Ascendant: Pivotal issues and Critical Perspectives, Kuala Lumpur: Institute of China Studies, University of Malaya, pp. 241-303. Zhongguo Caizheng Nianjian 中国财政年鉴, Beijing: Zhongguo Caizheng Jingji Chubanshe 中国财政经济出版社 / Zhongguo Caizheng Zazhi She 中國財政雜志社, various years. Zhongguo Tongji Nianjian 中国统计年鉴/China Statistical Yearbook (compiled by the Zhonghua Renmin Gongheguo Guojia Tongjiju 中华人民共和国国家统计局/National Bureau of Statistics of China), Beijing: Zhongguo Tongji Chubanshe 中国统计出版社/China Statistics Press, various years.


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Chapter 12 Development of Public-Private Partnerships: China and Australia in Perspective LooSee Beh

Introduction Public-Private Partnerships (PPPs) are the latest “new public management” development for the public services, a worldwide development, an alternative means of providing public infrastructure with a focus on services and/or outputs. The PPP model we have most in mind is that developed in the United Kingdom, Australia, and Canada under which a PPP project results in a contract for a private entity to deliver public infrastructurebased services, a switch from traditional public procurement methods to provision of infrastructure. Many countries have released its policy on PPPs and China, relatively new in joining governments around the world in exploring and developing PPPs, has potential due to the internal demand for more and improved public facilities and services. Partnership has been the fashionable trend since the UK Thatcher government embarked on a largescale privatization programme beginning with the sale of British Telecom in 1984. This evolution of PPPs models nonetheless also covered a large spectrum of projects across all states in Australia since the 1980s. In China, the position was only experienced in the year 2000 where a series of policies, guidance materials and rules relating to the provision of public facilities and services for example, the Ministry of Construction issued the “Opinions on Acceleration of Privatization Process of Public Facilities” in December 2002 and the “Rules on Management of Franchised Operation of Public Facilities” in May 2003. Among others, the Shenzhen Government also advocated the “Rules for the Franchised Operation of Public Facilities” in May 2003 and the Beijing Government the “Rules for the Franchised Operation of Basic Urban Facilities” in October 2003. However, in Hong Kong Special Administrative Region, PPPs have been fairly well established long before mainland China with proper guidelines by the Efficiency Unit, drawn upon the experiences of Australia (Victoria) and the United Kingdom. 186


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Development of Public-Private Partnerships ♦ 187

The term partnership is a dominant slogan in the rhetoric of public sector reform, capturing from privatization to PPP and now Private Finance Initiative (PFIs). By contrast, critics argue that the changes notably in the terminology represent little more than cosmetic repackaging (Wettenhall, 2003). These initiatives have been subject to increasingly vigorous criticism. In retrospect, many projects have been shown to have reduced the net worth of the public sector and misallocated risk (Quiggin, 1996, 2004; Spackman 2002). Particularly this partnership is about government and governance in the contemporary and public service and public interest in the market economy, setting in a different set of concerns. Leaving the noted criticisms, this chapter will bring you through in particular the discourse of development of PPPs in Australia and China including Hong Kong SAR. Evidence of development and issues of PPPs in China and Hong Kong SAR are reviewed followed by the Australian experience. China’s New Initiative in PPP China has been fortunate to have a history of economic prosperity. With a strong resource base and natural advantages, the capacity to provide responsible financial management of the nation is essential for future growth. The Government is mindful of keeping within the financial targets and in delivering infrastructure projects and ancillary services to its citizens. In recent years the terms Public-Private Partnerships (PPPs) and later Private-Finance Initiative (PFIs, though not much yet in China) have been used throughout the world to describe joint approaches to infrastructure and service delivery between the public and private sectors. In many countries, this engagement has occurred in the presence or the absence of a formal policy to protect the public interest and to guide the private sector. In some countries like Australia, United Kingdom, and Canada, such formal policy and related documents are evident for commitments to the highest standards possible for strategic partnerships in order to establish a strong record of responsible economic management. However, in China, it is not clear when and how PPPs should apply as there are still insufficient legal policy frameworks in use comparatively to other countries. Successful partnerships between the public and private sectors do rely on the creation of a business opportunity, which in turn relies largely on the existence of sufficient consumer demand. If bringing forward PPP projects simply because there exists the possibility of a private funding source, then it is unlikely to lead to a successful partnership arrangement.


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188 ♦ LooSee Beh

Though there exists policy frameworks such as “Opinions on Acceleration of Privatization Process of Public Facilities” in December 2002; “Rules on Management of Franchised Operation of Public Facilities” and “Rules for the Franchised Operation of Public Facilities” both in May 2003 and the “Rules for the Franchised Operation of Basic Urban Facilities” in October 2003, they are relatively minimum as compared to other developed countries who have been practicing PPPs. Though minimum, it serves as a start towards the circumstances of supporting PPPs. Development of PPPs in China In China, the majority of PPP types are either short or medium-term. Hence, the implication is that the long-term benefits of a reduced tax burden, less bureaucracy, and improved managerial efficiency may be in question. Wang Hao (2004) has classified China’s PPPs into three distinct types – outsourcing, concession, and divestiture. There are 14 different modes of PPP existing within these three generic types as demonstrated in Tables 12.1 and 12.2. From Table 12.2, there seems to arise two issues – over-complexity and property rights. As at to date, most of the PPP projects in China involve large consortiums including that of foreign companies and dominated by the buildoperate-transfer mode for large infrastructure projects. Table 12.1 Wang Hao’s (2004) Classification of PPP system in China Outsourcing

Concession

Divestiture

Design-build-transfer Purchase-upgrade-operate-transfer Purchase-upgrade- operate Design-build-maintain Lease-upgrade-operate-transfer

Build-own-operate

Operate and maintain

Build-lease-operate-transfer

Partial ownership

Design-build-operate

Build-own-operate-transfer

Share transference

Design-build-transfer-operate

Design-build-finance-operate


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Explanation

Public sector entrusts private companies with providing some services provided traditionally by government such as maintenance of equipment and/or cleaning services and payment for these services are according to contract.

Public sector entrusts private companies with operating infrastructure or providing management services according to contract. This is used typically in waste management.

Private sector designs and builds infrastructure and bears the risks of extension and any additional costs – the standards and the price are set in advance – assets are finally transferred to the public sector.

Public sector is responsible for the management of the infrastructure designed and built by private companies and private companies are responsible for major maintenance.

Public sector signs agreement with private sector that will be responsible for operation and maintenance of infrastructure according to contract – payment is in the form of fees from government. This is commonly used in provision of water and waste management services.

Though private companies are responsible for the design, build and operation of infrastructure, the ownership remains in the hands of government.

PPP

Service contract

Management contract

Design-build-transfer

Design-build-major maintenance

Operation and maintenance

Design-build-operate

Table 12.2 Types of PPP in China

Variable

5 – 8 years

Variable

Variable

3 – 5 years

1 – 3 years

Life of Contract


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Private companies operate the infrastructure which will be upgraded/extended and possess the ownership of the infrastructure during the life of the contract – ownership is transferred to the public sector at end of contract.

A long-run lease contract is signed in advance between the public and private sector. 25 – 30 years Infrastructure is built by private companies on public land and operated until the private capital is recovered through fees from users. The ownership of the assets is transferred to the public sector at the end of contract.

Private companies invest, build and operate the infrastructure until the capital is recovered through fees under a concession from the government. The ownership of the assets belongs to private companies during the period of concession and is then transferred to government at the end of the life of the concession.

The infrastructure is invested in and built by private companies and transferred to government at a pre-agreed price. It is then leased and operated by the private company. In this way, the risks from possessing asset ownership are avoided by the private company.

Purchase-upgrade- operate-transfer


Build-lease- operate-transfer

Build-own-operate- transfer

Design-build- transfer-operate

20-25 years

25-30 years

8 – 15 years

8 -15 years

Infrastructure is leased and operated for a certain period by a private company, during this period, the infrastructure will be upgraded and extended and the asset will be transferred to the public sector at end of contract.

Lease-upgrade- operate-transfer

Life of Contract

Explanation

PPP

Table 12.2 (continued) 190 ♦ LooSee Beh

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The private sector is responsible for the investment and establishment of the asset. The public sector is responsible for provision of core services to the asset and the private companies for related services. For example, a hospital is invested in and built by private companies but government provides the core medical services and private companies provide food and cleaning services.

The private sector purchases current infrastructure and operates and upgrades it. The private company possesses the permanent ownership at the end of the contract if the terms of ensuring the public interest can be met – but still under the supervision of government.

Private company invests, builds, and possesses permanent ownership of an asset under the terms of ensuring the public interest can be met – but still under the supervision of government.

Design-build-finance- operate

Purchase-upgrade- operate

Build-own-operate

Source: Adams, Young, and Zhihong, 2006; for more information, see Beh, 2007.

Explanation

PPP

Table 12.2 (continued)

Permanent

Permanent

20-25 years

Life of Contract


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192 ♦ LooSee Beh

Within the China context, the reasons for advocating PPPs in China are mainly: • Due to inadequate investment in public facilities and services given the high rate of urbanization, relatively low standard of public facilities and services; • Limited funding sources and inadequate private investment in public facilities and services given the main source is of government funding; • Slow rate of reform of state-owned enterprises and poor provision of public facilities and services. On the last point above, perhaps many have viewed the state-owned enterprises (SOEs) as relics of a failed economic experiment as had been in the pursuance of privatization policy by the Conservative Administration of Thatcher and Major from 1979 to 1997 of majority of state-owned enterprises. In the case of China, an out-of-date impression of SOEs distorts the picture of China’s competitive landscape as the line between the SOEs and privatesector companies has blurred considerably (Woetzel, 2008). Many observers define a Chinese SOE as one of the 150 or so corporations that report directly to the central government. Thousands more fall into a grey area, including subsidiaries of these 150 corporations, companies owned by provincial and municipal governments, and companies that have been partially privatized yet retain the state as a majority or influential shareholder. The oil company China National Offshore Oil Corporation (CNOOC) and the Chinese utility State Grid Corporation of China (SGCC), for instance, are clearly SOEs under the first classification, while the computer maker Lenovo and the appliance giant Haier are less clear-cut cases, in which the state is the significant shareholder. A majority of the equity in the automaker Chery Automobile belongs to the municipal government of Wuhu. Further, market forces unleashed by government reforms are pushing SOEs to become more open (Woetzel, 2008). The Chinese government has been promoting PPPs in the provision of public services to meet the needs of public facilities and improve quality, service delivery, and efficiency. In early October 2004, 54 infrastructure projects involving RMB 70 billion were bid for by private companies through the Ministry of Finance. Selected Cases of PPPs in China The government remained much in control of public sectors such as water services, energy, waste management, and public transport. In the mid 1990s,


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the China government promulgated the Circular on Attracting Foreign Investment through BOT Approach (No. 89 Policy Paper of 1994, the former Ministry of Foreign Trade and Economic Cooperation, January 16 of 1995) and the Circular on Major Issues of Approval Administration of the Franchise Pilot Projects with Foreign Investment (No. 208 Policy Paper of Foreign Investment, the former National Development and Planning Commission, the Ministry of Electric Power Industry, and the Ministry of Communications, 1995). These legislative circulars formed the basis for public private partnerships and foreign capital investments. Following that, the National Development and Reform Commission firstly approved three BOT infrastructure projects in 1996 including Chengdu No.6 Water Supply BOT Plant, Guangxi Laibin Power BOT Plant, and Changsha Wangcheng Power BOT Plant (failed) (Zhong, Mol, and Fu, 2008). Water and Waste Management In China, BOT/BTO contracts, transferring risk and payment to the public sector (i.e. with payments by a Public Authority rather than end-users), have been used for the development of new water-services projects. This is a positive phenomenon, but how real is any risk transfer? It might be argued that if the PPP fails it is quite likely that the Public Authority will incur extra costs to maintain the public service, so risk transfer will fail anyway to this extent. However, it would not be correct to suggest that this is what always happens if PPP projects get into trouble. One of China’s first wastewater treatment plants to be delivered using a PPP, the Guangzhou Xi Lang Wastewater Treatment Plant, was recently completed by the Guangzhou Sewage Treatment Co. (GSTC) and Earth Tech. (Anonymous, 2008). The consulting firm, which also helped arrange part of the project’s financing, served as the plant’s designer and construction manager and operator. As part of Guangzhou’s commitment to promote sustainable development and improve water quality in the Pearl River, the city decided to pursue an innovative approach to constructing new wastewater treatment facilities. The build-operate-transfer project was completed six months ahead of schedule and came in under a budget cost of approximately US$130 million. It has a maximum capacity to treat 260,000 m3/d and features a biological nutrient removal process and an ultraviolet disinfection system that are both state of the art. Earth Tech will operate and maintain the plant’s treatment systems for 17 years, after which operation of the plant will be returned to GSTC. The plant’s design includes a possible second


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194 ♦ LooSee Beh

phase that would double its capacity. The plant was financed in part by Tyco International, Earth Tech’s parent company, and a major Chinese bank. Direct investment demand for urban wastewater infrastructure (including wastewater treatment, sewers, and sludge treatment) in China is expected to be over US$30 billion between 2006 and 2010, to meet the objective of 60 per cent municipal wastewater treatment. Accordingly, local governments prefer direct private sector investment in new wastewater management resulting in high levels of Greenfield modes where financing is based on negotiated prices between the government and the private sector and is less dependent on the user fee/charge (Zhong, Mol and Fu, 2008). In the rural water management, it involves a 4-year US$6.792 million joint project by UNDP, Ministry of Water Resources, China International Center for Economic and Technical Exchange under the Ministry of Commerce, and The Coca-Cola Company in the provinces of Sichuan, Heilongjiang, Xinjiang, and Liaoning in providing basic sanitation, water safety technologies, rebuilding of drainage pipelines and ecologically sustainable agricultural technologies for water conservation. Health The China Health Alliance (CHA) is a new PPP catalyzed by the World Economic Forum’s Global Health Initiative. Founding members and partners of the China Health Alliance to date include Accenture, China National Textile and Apparel Council (CNTAC), Constella Futures, Esquel, Institute of Contemporary Observation, iKang, Karstadt Quelle, Marie Stopes International China, Pfizer, Social Accountability International, Standard Chartered Bank, Swire Beverages, UNAIDS, UNDP, World Health Organisation (WHO) and World Vision International. Each member is actively supporting the set-up and implementation of the Alliance’s programmes. The partnership is designed to educate, test, treat, and support Chinese company employees at risks of TB and AIDS besides raising public awareness of growing public health threats in China witnessing the pilot project in Guangdong (China Daily, 14th September 2007). Merck Sharp & Dohme, and DaimlerChrysler have formed partnerships with China’s non-governmental organizations and government agencies for example Ministry of Health on US$30 million project on HIV/AIDS prevention and treatment. Other partnerships include Quality Brands Protection Committee, International Council of Toy Industries, the China Business Council on Sustainable Development and Global Business Coalition on HIV/AIDS.


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Infrastructure Infrastructure development in China increased tremendously especially over the past 15 years. There are numerous projects to be elaborated upon within the complex interdependencies and networks. One such project is the Citong project where there were many challenges faced. Among those challenges were that the ownership of local transportation facilities localized from provincial government to the municipal government, revenue of Quanzhou Bridge is channelled fully into the city public accounts instead of partially as agreed upon earlier and the design of the connectivity of the highway to the city. Others include absence of operation right assurance, finance, standardized operation procedures, complex procedures of obtaining approval, and lack of regulation. Hence, the situation in which difficulties arise due to changes of agreements from time to time, deficiencies and unnecessary secrecy surrounding the contracts and public interests and allocation of risks accurately defined in the policy seems vital. China’s rapidly growing aviation industry has challenged on-going efforts to maintain effective safety and security operations. The US Training Development Aviation helped to structure the China Aviation Cooperation Program with the goal of facilitating U.S. government and U.S. aviation industry training and technical cooperation with China identified by the General Administration of Civil Aviation of China (CAAC). This programme is supported by twenty-one U.S. private sector member companies and public sector contributions from the Federal Aviation Administration and the CAAC. Most PPP infrastructure projects in China are concentrated in Beijing, Shanghai, and Shenzhen. The dominant forms used are mostly build-operatetransfer. Other PPPs China Gas Holdings enters into PPPs with municipal governments to distribute natural gas supply. There are 48 PPPs to date serving 800,000 households with projects worth US$4 million. With the expanding potential of abundant natural gas reserves, capital expansion and expertise available, there is large potential for demand in power generation and residential use and opening downstream activities to private sector thus introducing competition as compared to distribution traditionally controlled by municipal governments.


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Key Challenges Facing PPPs in China Since relatively PPPs is a new initiative in China, there exist commonly the key challenges namely: • Limited capacity of civil society/NGOs to manage partnership; • Lack of experience on commercial, technical, legal, and political aspects of PPPs; • Too much emphasis on attracting investment from private sector and too little attention to market competition; • PPPs have been treated as privatization of public facilities/services focusing on short-term return without a spirit of long-term partnership • The financial risk and burden shifted to public without the corresponding increase in service quality; • Inadequate knowledge on PPPs, lack of proper risk assessment; and • Lack of administrative framework for PPP projects. Recently, protecting private ownership was written in as an amendment to the Constitution of China. Though this may be a first step, there remains a risk to the ownership of any private assets that emerge under any of the PPP types currently enforce in China. This also posed a serious constraint on the foreign investment and private Chinese entities. Many private companies have felt that there is a big gap between the policy of central government and implementation by local government, when PPP projects are negotiated with local government, several aspects of the policy are likely to be changed in relation to local circumstances. Given the weaknesses in the PPP system, the issue of policy risk can be valid and the issue of non-sustainability. Opportunities for improper behaviour can arise as witnessed in the case of 37 officials who were sued over a 37-kilometer expressway project in Jixian, Tianjin. Another example is where State properties were embezzled secretly by the “red-capitalist”. As secret relationships between officials and contractors are difficult to identify, the tendency is that illegal practices can be far more widespread as many cases may go unreported and weak supervision as in the case of Guangzhou No. 2 underground line project. Even though much of the required legislation is in place, most project evaluations are not solidly assessed, making it prone to political intervention and cronyism. The absence of accountability often makes tendering processes not professionally executed and hence the observation of self-interest parties and corruption. It should be noted here that this situation also varies around the world and a growing criticism of such practices. A key aspect of PPPs, as the name suggests, is the central involvement of a private-sector entity with a public-sector entity. The objective of the


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partnership is to import private sector to the delivery of a service which has previously been accepted as the responsibility of government and it is the introduction of a private-sector entity which creates an accountability dilemma. After all, the choice of using a PPP as a medium to deliver services is a policy decision of the government. Rosenau (1999) argued that the success of a partnership arrangement was dependent on setting out clear goals and clear lines of responsibility. This can only be accomplished if the problem is well understood and the government service required is clearly specified. PPPs are generally entered into for a lengthy period of time, and are developed in an environment of uncertainty. Hence it is important to develop a governance framework that would involve performance aspects, tools of analysis, and key issues. There are many suggestions as to how PPPs can be better managed. One of these is pointed out here. According to Grimsey and Lewis (2004), among the key ingredients in developing a typical PPP project together with the roles of the government at each stage are: • A focus on defining services, with the emphasis on the delivery of infrastructure services using new or refurbished public infrastructure assets, • Planning and specification, so that government’s desired outcomes and output specifications are clear to the market, • Creating a viable business case for the private party, • Certainty of process, ensuring that any conditions to be fulfilled are clearly understood before the project proceeds, • Project resourcing to enable government to advance the project and address issues in line with published time-frames, • Clear contractual requirements, centred on key performance specifications, to promote performance and minimize disputes, • Formation of a partnership to encourage good faith and goodwill between government and the private party in all project dealings, • Contract management to monitor and implement the contract. The key question that needs to be addressed is do PPP projects deliver better results in terms of time and cost outcomes in comparison to traditional projects? Regardless of any viable complex risks allocation framework and service delivery performance in place, it should be mindful that the ultimate responsibility for service delivery and performance of essential public services rests with the government and the author believes that China is mindful of this responsibility. In this regard, the Hong Kong SAR contributes significantly to achieving the Government’s policy of PPPs.


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Development of PPPs in Hong Kong SAR In contrast, Hong Kong has established its PPP policy documents well emulating the UK and Australian model through optimal risk allocation and other efficiency measures. Hong Kong has a long history of attracting private sector investment and operating skills to deliver public services, most notably major infrastructure facilities such as the cross-harbour and other tunnels developed using the (Build-Operate-Transfer) BOT approach. A number of projects are at different stages of development, or have, for example, had feasibility studies conducted on them. PPPs in Hong Kong are most likely to adopt the Design-Build-Finance-Operate (DBFO) model or the DBO (DesignBuild-Operate) model. The major difference between a DBFO and a DBO, in the Hong Kong context, is the timing and nature of the payments for the facilities associated with the project. Recent examples of PPP projects in Hong Kong include Hong Kong Disneyland, Asia World-Expo, Ngong Ping Skyrail, and Marine Police Headquarters and many other potential projects such as North Lantau Hospital, Cruise Terminal, West Kowloon Cultural District, Sports Stadium, etc. In Hong Kong, the definition of PPP has been termed differently from privatization just as in the context of Australia. With a PPP, government retains ultimate responsibility for the delivery of services throughout the contract. Although some PPPs may involve existing government assets being transferred to the private partner in Hong Kong this will normally only be for the duration of the contract, not in perpetuity. After the expiry of the contract term the service obligation will revert to government. On occasion, as with a privatization, a PPP may also involve the opportunity for civil servants to transfer permanently or temporarily. Subject to the proper construction and interpretation of any relevant legislation in any particular situation, the Government has extensive constitutional and common law powers to make commercial contracts including PPP contracts. There are lists of documents pertaining to PPPs such as A General Guide to Outsourcing, A User Guide to Contract Management, and An Introductory Guide to Public Private Partnerships (PPPs). Outsourcing is one of the key forms of private sector involvement in Hong Kong. It supports Government’s policy of minimum intervention and maximum support. Over the past few years, government departments have contracted out many activities including capital development (infrastructure and building) and administrative and maintenance functions (building and property management, cleaning, security, plant and equipment maintenance), environment, hygiene, training and development and welfare services. The


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Independent Commission Against Corruption (ICAC) has published a best practice guide on government outsourcing. In Hong Kong, a PPP is considered in circumstances where: • There is a major investment programme, requiring effective management of risks associated with construction and delivery; this may be a single major project or a series of replicable smaller projects; • The private sector has the expertise to deliver and there is good reason to think that it will offer value for money; • The structure of the service is appropriate, allowing the public sector to define its service needs as outputs/outcomes that can be adequately contracted for in a way that ensures effective, equitable and accountable delivery of public services in the long term; • Where risk allocation between the public and private sectors can be clearly made and enforced; • The nature of the assets and services involved are capable of being costed on a long-term, whole of life basis; • The value of the project is sufficiently large to ensure that procurement costs are not disproportionate; • The technology and other aspects are reasonably stable and not susceptible to short term paced changes. Where a project involves a facility (e.g. a hospital) where the equipment inside is subject to rapid technological development, arrangements separate from the PPP contract can be made; • Planning horizons are long term, with assets intended to be used over long periods. Circumstances in which PPP are not favourable are also mentioned. PPP proposals also take into account public interest criteria covering accountability, transparency, equity, public access, consumer rights, security, privacy, and the rights of affected individuals and communities. The principles of transparency and accountability are crucial to the affected and interested parties, further minimizing the likelihood of any misunderstandings or misperceptions. Hence we see the extensive policy making of PPP structured framework and governance of PPP in Hong Kong as compared to mainland China. The roles played by the public and private sectors are distinctively established and within the various departments in the public sector are defined. The utilization of a public sector comparator as exampled in Australia is another element besides value for money which enables comparison with bids and allowances for imputed cost of government borrowing and appropriate level of investment. All these are made public knowledge where possible. With clear statements of information and output performance specifications, then


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the desire for well-established PPP process and projects are committed into managing risks and re-assessment of risks throughout the PPP approach. Areas of funding and payment and managing performance can then be dealt with effectively taking into account changes in circumstances and issues that may arise later. Thus the governance of PPP and its intended output is effectively enforced in Hong Kong as also emulated upon in Australia. Development of PPPs in Australia It was not necessarily a fear of failure that ended the extensive privatization policy but, rather, the fact that there was little left to sell or politically possible without alienating public opinion. It was at this point that PPPs started to emerge. For example, with PPPs, overall control of health and education could remain with the public sector but the private sector could be involved in some aspects of the supply of such services (Broadbent and Laughlin, 2004). In contrast to China, PPPs in Australia have developed well into the final maturity curve of privatization. Policy and guidance materials have been developed at the federal and state levels each with its own retrospect compared to China. However, despite its maturity, notwithstanding, PPPs in Australia have experienced much success on many occasions but also effectively failed on numerous occasions and particularly infrastructure. Infrastructure Australia The current federal infrastructure policy is based on the Department of Transport and Regional Services’ 2004 AusLink white paper. When the Rudd government took over in 2007, one of the first acts was to rename the old Department of Transport and Regional Services (DoTARS), it is now called the Department of Infrastructure, Transport, Regional Development and Local Government. It is significant in the sense that it is a clear statement to the community and department bureaucrats that the department is under new management. This was reflected in the established Infrastructure Australia on 21 January 2008. Among other objectives, Infrastructure Australia will analyze the regulatory and financial issues, evaluate the methods of implementation including the pros and cons of PPPs. The plan is that Infrastructure Australia will be a statutory authority and produce its first Infrastructure Priority List within 12 months. However, there were criticisms on the rationale why a response should take 12 months when the agenda should be established within the first 3 months (Ericson, 2008).


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PPP Framework At the Australian government level, the term, PPP refers to a form of government procurement involving the use of private sector capital to wholly or partly fund an asset that would have otherwise been purchased directly by the government. A PPP arrangement is generally an option to be considered for major asset and infrastructure procurements. PPPs are often used to support, or in conjunction with, the delivery of related services. The procurement arrangements are managed through long-term relationship contracts with private sector financiers and service providers. The government has established a specialist PPP Unit within the Department of Finance and Administration (Finance). The Unit will work collaboratively with agencies and their advisers to assist with assessing the relative merits and viability of PPP proposals. According to the document Australian Government Policy Principles for the Use of Public Private Partnerships, Financial Management Guidance No. 21, the PPP principles set out the: a) types of arrangements to which the PPP Principles will apply; b) relationship between the PPP Principles and existing policy and processes; c) policy principles that must be considered when developing procurement proposals which scope the use of PPPs; and d) assessment and approval processes for PPP proposals. The Australian Government’s objectives in establishing the PPP Principles are to: a) provide agencies with guidance, through a policy and process framework, when developing PPP proposals and assessing the relative merits of PPP arrangements in comparison with other procurement methods; and b) help ensure the effective and responsible allocation of Australian Government resources and fiscal management. According to this document, the PPP principles will apply to a relationship or proposed relationship between the Australian Government and the private sector where private sector finance is used to fund an asset or infrastructure (whether or not ultimately owned) that is used to deliver goods, services or other outputs for or on behalf of an agency. The assets or infrastructure may be used in conjunction with associated services, which may also be delivered by the private sector, to produce an output which contributes to the achievement of government defined outcomes. The key feature distinguishing PPPs from


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traditional procurement is that the private sector acquires the underlying asset or infrastructure, at least initially. In return, the Australian Government makes long-term commitments to pay for the resulting outputs. The potential for a PPP procurement approach exists where there is opportunity for: a) long-term contracts (e.g. 15 to 30 years) involving asset based procurement, with a whole-of-life cost in excess of $100 million. Projects in the range of $20 million to $100 million can also be considered as PPPs; b) risk transfer, including an optimal level of ownership and operational risk, including residual value risk between the parties; c) grouping of a range of individual service and asset provision contracts into a single long-term contractual agreement; and d) implementing a performance based contract. The ability for the private sector project to earn additional revenue, by selling excess capacity associated with the underlying infrastructure to third parties may also be an indicator of a PPP representing value for money. The three core principles for assessing whether a PPP arrangement should be the preferred procurement method used are: value for money, transparency, and accountability. A core principle that underpins procurement activity, including PPPs, is value for money. It is to be tested by comparing the outputs and costs of PPP proposal against a neutral benchmark, called the Public Sector Comparator (PSC), developed by the agency (and its advisers) in consultation with the PPP Unit. These encompasses the factors of innovation, risks transfer, cost and risk issues improved asset utilization, ownership and management synergies, and improved project management. There are more details involved in the PSC which will be found in my other upcoming writings. The second principle, transparency, is related to the disclosure of information to the Joint Standing Committee on Public Works, which considers and reports on Commonwealth public works projects. The use of PPPs should not diminish the availability of information to Parliament, taxpayers, and other stakeholders on the use of government resources. Completed PPP contracts should be disclosed in an agency’s annual report in accordance with the Finance Minister’s Orders. Financial statements included in an agency’s budget documentation should be prepared on a basis consistent with the annual report to which provisions of the Charter of Budget Honesty Act 1998 apply. The third principle, accountability, pay close attention to how existing accountability arrangements impact on the relationship between agencies


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and contractors. Standard best practices clauses on audit access, security, privacy, and parliamentary access should be included in all PPP arrangements. Further guidance has been developed and issued by Finance. These will support the development of a thorough and enduring PPP policy framework commensurate with experience gained from the application of PPPs in the Australian context. The Governance of PPPs in Australia Notwithstanding, the governance of PPPs in Australia are not without problems and challenges where arrangements often involve a more complex set of operational management and financial risks than traditional approaches. The lack of a suitable contracting and governance (direction and control) framework for PPPs is noted by Hodge (2004), who studied risks associated with PPPs by looking at formal contract conditions. In reality, not much is known about the specific factors that contribute to governance and project success or failure (Bloomfield, 2006). Johnston and Gudergan (2007) indicated three themes relating to PPP governance issues which are divided into the technical-rational, social context and risk. The evidence suggests that contracts, as government systems within PPPs are usually incomplete and not up to a level of competence that allowed the contract to remain as a governance control mechanism once the implementation phase was reached. Due to unforeseen risks, this led to a breakdown in the social contract through political risk. There is a huge literature on PPP projects in Australia that are too luminous to be detailed in this chapter alone, hence only some are reviewed here not with the intention of leaving out any significant PPP projects, (if there are then it is only with the author’s error) but only for the purpose of demonstrating the involvement and undertaking of the respective state governments in these PPP initiatives. PPPs in Victoria Examples of early PPPs in the late 1980s – 1992 include the Victorian Accelerated Infrastructure Program, Train/Locomotive Leases, St. Vincent’s Hospital Redevelopment and Melbourne Magistrates Court. The objective at the time was achieved but often through inefficient arrangements. In the 1993-1999 era, PPPs were governed by the Infrastructure Investment Policy for Victoria (1994). The PPPs of this era were generally characterized by high


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level of risk transfer, private sector being responsible for full service provision including custodial services in prisons and clinical services in public hospitals, the private-sector entity not being paid until the commencement of services, and the government not guaranteeing returns, as it did in the late 1980s and early 1990s. Examples of PPPs of that period include the Melbourne CityLink, various water and wastewater treatment plants, public transport franchises, three prisons (Women’s, Port Philip and Fulham) as well as Latrobe and Mildura Hospitals. Concerns reported by the audit review of government contracts were that: (1) social and regional impact analysis was deficient; (2) benchmarking performance levels involved only limited comparisons; (3) economic evaluation was not undertaken in some cases and was not comprehensive in some others; and (4) unnecessary secrecy surrounded some of the major contracts. From the year 2000 to present, there is a better clear quest to achieve value for money in the public interest outlined in the Partnerships Victoria policy released in June 2000 and other guidance materials widely regarded as one of the most comprehensive released the following year: The Overview, The Practitioners’ Guide, The Risk Allocation and Contractual Issues Guide, and The Public Sector Comparator. Other guidance material released later include Contract Management Policy and Guidelines (June 2003), Public Sector Comparator Supplementary Technical Note (July 2003), and Use of Discount Rate in the Partnerships Victoria Process (July 2003). The Partnerships Victoria policy introduced in 2000, provides the framework for a whole-of-government approach to the provision of public infrastructure and related ancillary services through PPPs. Partnerships Victoria is part of the Commercial Division in the Department of Treasury and Finance. There are 17 Partnerships Victoria projects in existence worth around AUD5.5 billion in capital investment. The policy focuses on whole-of-life costing and full consideration of project risks and optimal risk allocation between the public and private sectors. There is a clear approach to value for money assessment and the public interest is protected by a formal public interest test and the retention of core public services. Since 2002-03, Partnerships Victoria projects have accounted for approximately 10 per cent of annual public asset investment commitments. It aims to use the innovative skills and abilities of the private sector in a way that is most likely to deliver value for money and improved services to the community. It is used for major and complex capital projects with opportunities for innovation and risk transfer. If the private-sector bids are not able to demonstrate superior value for money, the project will generally proceed under the traditional procurement


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approach. For example, the Fibre Optic Cable project was originally intended to be delivered under the Partnerships Victoria approach but ended up being delivered under the traditional approach due to Partnerships Victoria bids not delivering value for money. The City Link road infrastructure project in Melbourne was one of Australia’s largest public infrastructure BOOT projects. Linking up three major freeways in Melbourne – the South Eastern, West Gate and Tullamarine Freeways, the City Link comprised the construction of 22 kilometres of road, tunnel and bridge works through difficult silt conditions, as well as other associated works. There was a stream of legal controversies which surrounded the project in addition to political and governance risks (Hodge, 2004). PPPs in New South Wales (NSW) Road agencies are contracting out more design aspects and are experimenting with combined contracts for construction and maintenance. An example is the Design, Construct and Maintain (DCM) contract for the BulahdelahCoolongolook deviation on the Pacific Highway in New South Wales, under which the contractor maintains the road for 10 years. The uncertainty of future funding for road agencies usually discourages such long-term commitments. A shadow toll arrangement resembles a DCM contract, except that government payments to the developer increase with the volume of traffic rather than being a fixed sum. The additional payment for each vehicle is a ‘shadow’ toll paid out of general government revenue, rather than an actual tool that is charged to the road users. The new tolling arrangement for the M4 and M5 motorways in Sydney resemble shadow tolls; the government reimburses tolls paid for non-business vehicles that are registered in-State. In Sydney, NSW, procurement strategies labelled generically as PPPs have been a popular approach. By 2001, more than $AUD5.5 billion worth within 20 infrastructure development and up till late 2005, $AUD3.4 billion had been implemented into PPP private too-way arrangements. Yet, a range of important PPP governance and organizational issues continue to remain problematic (Audit Office of NSW 2006). The Cross City Tunnel (CCT) tollway in Sydney, which became operational in August 2005 failed in December 2006. It was in fact, a Privately-Funded Project (PFI) but seemingly used under the generic label PPP. The major problems were the cost of tolls which was above the level the public was prepared to pay, limited alternative surface routes, accusations about traffic funnelling. Some aspects of governance and management were problematic at the beginning of the operational phase. The toll was reduced eventually and road changes were later reversed by the


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Government against the contract terms and this action is now subject to a legal claim with the company into the hands of an administrator and CCT sold to another private operator (Johnston and Gudergan, 2007). It is noted that, in NSW, Treasury (2006) now have revised PFP guidelines which require a project board to continue well into the implementation phase of the PPP. This did not exist at the time that the CCT project failed. The Build, Own, Operate and Transfer (BOOT-type) arrangements for several urban motorways such as Melbourne’s City-Link are the farthest Australia has gone toward privatizing the road network. The arrangements provide private funding for motorways for which public funds are hard to raise. Recent BOOT projects in Australia have been mostly completed ahead of schedule. The Sydney M5 Motorway took two years to build, not four years as scheduled by the Roads and Traffic Authority, (RTA) New South Wales. Correspondingly, the construction period is reduced from four to two years. The main appeal of BOOT-type projects, compared with shadow tolling arrangements, is the reduced need for public finance (BTCE Working Paper 33, 1997). Evidence of cost savings from contracting out government services need to be viewed cautiously. It is limited in that it relates to construction costs only. On the M4 tollway, the use of asphalt rather than concrete paving reduced the costs of construction. RTA indicated it would pursue a more tightly conditions of the asset on transfer. The M5 tollway provides another example of the possible pitfalls in cost comparisons. RTA designers would have opted for relatively few piers and longer spans, to increase the bridge’s aesthetic appeal and to minimize the obstacles to recreational users of the river. The developer’s design was less satisfactory in these respects but took much less time to build (BTCE Working Paper 33, 1997). PPPs in South Australia Partnerships SA is a procurement programme for the private and public sectors that seeks to promote private sector participation in the delivery of Government services to the community where there are sound reasons to support this approach. Partnering arrangements are not privatization. Under a partnering agreement, the Government retains a key strategic interest in the infrastructure and strong policy control over the services delivered, and in many cases, shares the risks of the project in agreement with the private sector partner over the life of the service agreement. The private sector can contribute innovative ideas and commercial discipline to the process. Equally, the private sector has a crucial role to play in protecting the public interest and


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safeguarding taxpayers’ funds, having responsibility for deciding the level of services required given available resources and establishing and monitoring safety, quality and performance standards. In considering private sector participation in public services, the Government will need to be satisfied that a number of key criteria are met. These criteria are as follows: • private sector involvement must deliver a net benefit to Government, having regard to the risks of the project, compared to traditional public sector delivery; • the risks associated with the project are clearly identified and allocated to the parties best able to manage those risks; • projects are subject to a competitive bidding process. Direct negotiations may be entered into only under a limited set of circumstances; and • probity is maintained during all phases of the process. The purpose of the Projects and Government Enterprises Branch (PGE) is to facilitate private sector participation in infrastructure development where appropriate. PGE is located in the Department of Treasury and Finance, the Branch reports directly to the Under Treasurer. Agencies are required to consult with PGE in regard to all PPPs in South Australia. The role of the PGE is to: • oversee Public Private Partnership (PPP) projects in South Australia by aiding agencies in the PPP process from the outline business case through to financial close. The branch also has responsibility to develop policy and guidelines related to PPPs, and to participate in intergovernmental forums dealing with PPP policy. • provide investment and financing analysis for major government projects with a particular focus on infrastructure projects. This involves investigating alternative financing options for projects that have been identified as priorities and where Government has approved the investment (outline) business case. This ranges from investigating alternative financing/procurement options through to supporting projects through to contractual and financial close. Recently, South Australia has introduced competitive tendering for maintenance of state roads, whereby the maintenance business units of the Department of Transport bid against private contractors. South Australia’s larger state-based contractors were reluctant to bid because of heavy workloads on other projects at the time. Some of the current PPP projects in South Australia include Regional Police Stations and Courts and prisons.


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PPPs in Tasmania In July 2000, the Government released a policy statement, and guidelines, on private sector participation in the provision of public infrastructure. By issuing the policy statement and guidelines, the Government is indicating its strong commitment to maintaining and improving Tasmanian public infrastructure. The publications provide a clear framework – and detail – regarding the Government’s objectives in seeking private sector involvement in infrastructure development. The ‘Policy Statement’ paper outlines the framework within which the public sector seeks and develops infrastructure opportunities with the private sector. The ‘Guiding Principles’ paper is a detailed document aimed at managers in agencies. It provides a clear set of ‘ground rules’ for optimizing the participation of the private sector in the provision of public infrastructure. The ‘Guiding Principles’ paper: • makes clear the Government’s attitude to critical issues for private sector involvement (e.g. achieving net benefits for the community); • provides agencies with clear guidance on how to engage the private sector; • clarifies the public policy context of infrastructure provision; • outlines the lodgement, assessment and approval process through which a project must pass; and • provides agencies with practical advice covering a checklist of the process, the determination of a public sector benchmark and the development of a business case for an infrastructure proposal. The private sector is expected to increase its involvement in the provision of public infrastructure as it responds to the additional clarity in the objectives of the Government provided by the release of the Government policy. The titles of the two publications are: (1) Private Sector Participation in Public Infrastructure Provision-Policy Statement; and (2) Guiding Principles for Private Sector participation in Public Infrastructure Provision. PPPs in Queensland and Northern Territory The Value for Money Framework is a key element of the guidance material which provides the basis for implementation of Queensland’s PPP Policy. It sets out comprehensive procedures for evaluating project delivery options to satisfy specific needs for infrastructure. In September 2001, the Queensland Government released its policy on PPP, delivering all major infrastructure projects that support the government’s strategic objectives. Queensland’s PPP


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policy encompasses the full spectrum of project delivery options involving design, build and operate; build, finance and operate; and equity sharing arrangements. Further, there are numerous variations on these concepts including build, own, operate and build, own, operate, transfer structures. Maintenance work on the Barkly Highway is performed by private contractors on the Northern Territory side and by a local council on the Queensland stretch to Cloncurry. In 1994-95, the Queensland Government paid the local council $3,356 per kilometre of road maintained, far more than the $690 paid to the private contractor on the other side of the border. The local council is the sole invitee for the maintenance contract in Queensland, whereas the Northern Territory uses competitive tendering. However, other factors, such as the type and amount of maintenance work performed, would also need to be considered. According to the South East Queensland Infrastructure Plan and Program 2008-2026 published in June 2008, in Queensland, the government’s experience in working with the private sector has been positive with the Tugun Bypass and Inner Northern Busway both completed ahead of schedule, the South East Queensland Water Grid progressing on schedule and the Southbank Institute of TAFE redevelopment ahead of schedule. Another major project, the Airport Link Tunnel, is currently one of Australia’s largest road tunnel public private partnerships. This tunnel will link the North-South Bypass Tunnel, Inner City Bypass and local road networks in the city’s northeast. It will include two parallel, seven-kilometre tunnels – under several inner northern suburbs, including Wooloowin and Clayfield, and is set to open in mid 2012. The Southbank Institute of TAFE Redevelopment Project is Queensland’s first public private partnership which in 1997 was awarded Best Global Project by the International Public Private Finance Awards. The project involves the construction of 11 new buildings and renovation of another four buildings on the South Bank campus. The South East Queensland Schools project, where seven new schools in the region are proposed to be built and maintained through PPP. All seven schools are due to be open for students by 2011. This PPP will be the first of its kind in Australia to be delivered under the supported debt model, which will innovatively use a combination of public and private funds to improve value for money. Another project, the Gateway Upgrade is currently the largest road and bridge infrastructure project in Queensland’s history. Queensland Motorways Ltd (a government-owned company) is delivering the project through a 30-year franchise agreement and has awarded the design, construction and


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maintenance contract to a private sector partner. One major hospital project – the Sunshine Coast Hospital is being considered as a potential PPP. Concluding Remarks A PPP may not always be the answer, so it is important to closely investigate the technical and policy issues, the costs, and the risks involved before choosing a delivery approach. Circumstances differ widely between each infrastructure proposal, and specialist expertise is required to ensure the analysis is comprehensive. A key characteristic is the flexibility of the policy which ensures that there is the ability to respond to the changing needs of our communities in an evolving social and economic environment, paradoxically, the politics of policy in celebrating the political convictions of PPPs. PPPs may be a new initiative and still developing in China. Nevertheless, China can draw comparisons from PPPs experiences in different countries in areas where the private sector has a proven track record in the successful delivery of assets and their ancillary service needs and even within the nation, relatively better PPP governance in Hong Kong Special Administrative Region. This provides the opportunity for major public assets to be maintained and preserved to a standard which is higher than has been traditionally possible by the public sector. Whilst this is evidenced, the procurement plan must clearly justify why a PPP is the preferred procurement approach. In developing the expressions of interest in a PPP project development and evaluation of those interests must be fully documented with all recommendations fully justified. On the other hand, the case made by a Public Authority for a PPP can be equally one-sided, for example with claims of large cost savings compared to public-sector procurement which cannot be proved objectively, or which do not compare like with like, and PPPs may be promoted for short-term political advantage, not just particularly China but for many other countries too. Further, PPPs have been subjected to considerable controversy following some high profile ‘failures’ in many countries which have long developed PPPs. Perhaps it is important to ponder on comments made by Broadbent and Laughlin (1999; 2004) that revealed many unanswered research questions. Five research questions come to mind despite the progress to PFIs and still remain relevant. i) What is the underlying nature of and rationale for deciding to pursue PPP developments in different countries? ii) What processes and procedures guide and aid the decisions to undertake PPPs in different areas of public service provision in different countries?


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iii) What procedures and processes are in place to provide a post-project (decision) evaluation in different areas and in different countries? iv) Do PPPs have real merit and worth, generally and in specific cases, nationally and internationally? v) What can we discover through an international comparison from national PPP regulation and guidance, pre-decision processes, post-project evaluation systems and merit-and-worth judgments? The particular areas that the Australian government sees as being important for the evolution of PPPs are: (1) improving the bidding and evaluation processes; (2) developing the national market; and (3) increasing the range of PPP models (Maguire & Malinovitch, 2004). A public-private partnership will be most efficient when each sector operates where it has a comparative advantage. Nonetheless, policy-makers and practitioners may need to rely on evaluation information about a partnership’s performance as a governing entity and its value-add, to make judgements about effectiveness (Pope and Lewis, 2008). Finance is a lesser concern and, despite criticism of PPPs, they will remain the preferred financing method. Less appealing, governments seem to take little notice of the critics. In a nutshell, there remains a more general need to explore what can be learned through a global and local comparison across all PPPs. This would contribute to the debate about the applicability of PPPs and how they can genuinely contribute to the welfare of the individuals and nations. PPP policy is a continuous development of public administration and it is important that the policy practices remain under review beyond marketbased rhetoric of limited substance and ensuring procedural integrity of the process is maintained. In the context of the on-going debate on PPPs, many governments of the day continue to support the PPP model with welldeveloped implementation frameworks. References Adams, J., A. Young and W. Zhihong (2006), “Public Private Partnerships in China – System, Constraints and Future Prospects”, International Journal of Public Sector Management, 19(4), pp. 384-396. Anonymous (2008), “Public-Private Partnership Used to Deliver Chinese Sewage Plant”, American Water Works Association Journal, May, 100(5), p. 146. Audit Office of NSW (2006), “Performance Reports – 2006 – Cross City Tunnel Project – Executive Summary”.


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Australian Government Policy Principles for the Use of Public Private Partnerships, Financial Management Guidance No. 21, December 2006, Department of Finance and Administration, Commonwealth of Australia. Beh, LS. (2007), “The Politics of Administrative Reform: Malaysia and China in Perspective”, in Emile Kok-Kheng Yeoh and Evelyn Devadason (eds.), Emerging Trading Nation in an Integrating World: Global Impacts and Domestic Challenges of China’s Economic Reform, Kuala Lumpur: Institute of China Studies, University of Malaya, pp. 197-232. Bloomfield, P. (2006), “The Challenging Business of Long-Term Public-Private Partnerships: Reflections on Local Experience”, Public Administration Review, 6(3), pp. 400-412. Broadbent, J. and R. Laughlin (1999), “The Private Finance Initiative: Clarification of a Future Research Agenda”, Financial Accountability and Management, 15(2), pp. 95-114. Broadbent, J. and R. Laughlin (2004), “PPPs: Nature, Development and Unanswered Questions”, Australian Accounting Review, July, 14(2), pp. 4-10. Bureau of Transport and Communications Economics (BTCE) (1997), “Benefits of Private Sector Involvement in Road Provision: A Look at the Evidence”, Working Paper 33, Canberra: Commonwealth of Australia. Efficiency Unit (2008), Serving the Community by Using the Private Sector: An Introductory Guide to Public-Private Partnerships (PPPs), The Government of the Hong Kong Special Administrative Region. Ericson, M. (2008), “Infrastructure and the Vision Thing”, The Australian Journal of Public Administration, 67(4), pp. 405-418. Grimsey, D. and M.K. Lewis (2004), “The Governance of Contractual Relationships in Public-Private Partnerships”, The Journal of Corporate Citizenship, 15, Autumn, pp. 91-109. Hodge, G.A. (2004), “The Risky Business of Public-Private Partnerships”, The Australian Journal of Public Administration, 63(4), pp. 37-49. Hodge, G.A. and C. Greve (2007), “Public-Private Partnerships: An International Performance Review”, Public Administration Review, 67(3), pp. 545-558. Johnston, J. and S.P. Gudergan (2007), “Governance of Public-Private Partnerships: Lessons Learnt from an Australian Case?”, International Review of Administrative Sciences, 73(4), pp. 569-582. Maguire, G. and A. Malinovitch (2004), “Development of PPPs in Victoria”, Australian Accounting Review, July, 14(2), pp. 27-33. Partnerships SA Guidelines, 18th July 2007. Partnerships Victoria. Pope, J. and J.M. Lewis (2008), “Improving Partnership Governance: Using a Network Approach to Evaluate Partnerships in Victoria”, The Australian Journal of Public Administration, 67(4), pp. 443-456. Quiggin, J. (1996), “Private Sector Involvement in Infrastructure Projects”, Australian Economic Review, first quarter, pp. 51-64.


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Quiggin, J. (2004), “Risks, PPPs and the Public Sector Comparator”, Australian Accounting Review, 14(2), pp. 51-61. Rosenau, P.V. (1999), “Introduction: The Strengths and Weaknesses of Public-Private Partnerships”, American Behavioral Scientist, 43(1), pp. 10-33. South East Queensland Infrastructure Plan and Program 2008-2026, June 2008, Department of Infrastructure and Planning, The State of Queensland. Spackman, M. (2002), “Public-Private Partnerships: Lessons from the British Approach”, Economic Systems, 26(3), pp. 283-301. Wang Hao (2004), “A Study of the Definition and Classification of PPP”, Beijing Infrastructure Investment Corporation, Beijing. Wettenhall, R. (2003), “The Rhetoric and Reality of Public-Private Partnerships”, Public Organization Review, 3(1), pp. 77-107. Woetzel, J.R. (2008), “Reassessing China’s State-Owned Enterprises”, McKinsey Quarterly, Issue 3, pp. 59-65. Zhong, L., A.P.J. Mol and T. Fu (2008), “Public-Private Partnerships in China’s Urban Water Sector”, Environmental Management, 41, pp. 863-877.


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Index

administrative decentralization 168169, 182 agribusiness 27, 164 Anti-Fascist People’s Freedom League (AFPFL) 78 ASEAN Economic Community (AEC) 4, 33-34 ASEAN FTA (AFTA) 34, 51 ASEAN plus China summit (10+1) 30 ASEAN Security Community 34 ASEAN Socio-Cultural Community 34 ASEAN-Ten Plus Three 63, 75 ASEAN-Five Plus Three 133-134, 136-141 Asia-Pacific 3-4, 102-103 “Asia Peace Zone” 85 Asian Development Bank (ADB) 23, 29, 31, 35-36, 59-60, 75

146-147, 149-150, 157, 159, 190, 193, 195, 198, 201 central planning/planned economy 145, 168 China Banking Regulatory Commission (CBRC) 150, 152-153 China Development Bank 27, 154 China National Offshore Oil Corporation (CNOOC) 192 China Natural Rubber Association 106 China-ASEAN FTA (CAFTA)/ ASEAN-China FTA (ACFTA) 4, 14, 34, 49, 51, 110 China-ASEAN Summit 16 collaboration 4, 6, 39, 84, 113, 159, 201 commercial bank 8, 145-157 Communist Party of China (CPC)/ Chinese Communist Party (CCP) 78, 80, 84, 88-89, 97, 100, 102, 105, 145, 150 comparative advantage 82, 105, 111, 140-141, 211 comprehensive economic cooperation agreement (CECA) 40, 52-53 consolidation 39, 119, 145 cross-cultural communication 113

balance of payments (BOP) 7, 62-63, 133-134, 139-141 Bali Dialogue 63 banking reform 146-147, 150 Beibu (Tonkin) Gulf 7, 117 Beibu Gulf Rim economic development 128 Beihai 29, 120, 123, 127-128, 145 bilateral trade 5, 13-16, 24, 28, 44-45, 63, 73-74, 82, 96 Bohai Bay 117, 123-124 build, own, operate and transfer (BOOT) 205-206

design-build-finance-operate (DBFO) 188, 198 design-build-operate (DBO) 188-189, 198 devaluation 61-65, 73, 75-76, 141 disparity 8, 159, 166-167, 184 disposable income 162, 166

capital 22, 34-35, 50, 61, 107, 109, 111-112, 114, 128, 138, 140-141, 215


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216 ♦ Index

drop-out rate 165 dual-track currency system 61 economic cooperation 5, 13-14, 22-23, 28-30, 35, 40-41, 51-52, 95, 98, 100-101, 105, 119, 123, 193 economic decentralization 8, 168, 181182 economic integration 7, 9, 13-14, 30, 34-35, 39, 49, 75, 110, 117, 119 economic management system 168 economic partnership agreement (EPA) 33, 35 efficiency 4, 33, 48, 145, 147, 150-151, 157-158, 183, 186, 188, 192, 198, 203, 211-212 environmental protection 7, 23, 112, 118-119, 125-127, 129, 131, 172, 177 exchange rate 5, 62-70, 73-74, 134, 141, 148 export 3, 14, 17-19, 24-25, 27-28, 35-38, 42-44, 56-57, 61-62, 65, 67, 73, 80-83, 87, 96, 98, 104, 112-114, 122, 133-135, 140-141 financial system 8, 147-148 fiscal decentralization 169, 179-180, 182, 184 fiscal policy 141, 179 fiscal reform 8, 168-169, 171, 173, 175, 177, 179-181, 183-185 foreign agriculture aid 107 foreign bank 145-146, 149, 151-153 foreign direct investment (FDI) 3-4, 17-22, 35, 45-46, 61, 109, 133 free trade agreement/free trade area (FTA) 4, 14, 16, 33-35, 37-41, 50, 55, 58, 63, 110, 118-119, 125 geopolitics 130 globalization 4, 7, 30, 109, 112, 117, 119 “Going Global” strategy 6, 104-111, 113, 115


Golden Triangle 114 Great Leap Forward 124 Greater Mekong Sub-region (GMS) economic cooperation 22-29, 31, 119 greenhouse effect 121, 124 gross regional product (GRP) 161-162 health 148-149, 157, 166-167, 169, 172, 177, 179, 184, 194, 200 huinong 惠农 policy 167 income 5, 7, 63-67, 70, 73-75, 133135, 137-141, 162-167, 172, 177, 182 import 7, 18-19, 24, 26, 28, 35, 37-38, 40, 42, 61, 64-65, 67, 73, 82, 96, 98, 101-102, 104, 107-108, 110, 113-115, 133-141, 197 Indochina War 79 industrial production 66-68, 128 industrialization 19, 82, 84, 127, 129, 133, 138 intellectual property rights (IPRs) 33, 35, 52-53, 55 intergovernmental relations (IGR) 169, 180 international reserve 148 intervention 47, 114, 148, 196, 198 investment 3-5, 9, 13-14, 19, 21-23, 27-29, 31, 34-35, 38, 41-45, 49-50, 52-53, 61, 98-99, 102, 106-107, 109, 111-114, 119, 123, 125, 127128, 133-134, 138, 151, 161-162, 183, 191-194, 196, 198-199, 203204, 207 J-curve 63-64, 73-75 Jiang Zeming 159 Korean War 84, 86-87 Kuomintang (KMT) 86-87 k-workers 167

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Index ♦ 217

Lancang-Mekong River sub-regional cooperation 110 liberalization 4, 7, 33, 50-51, 53, 55, 61, 133-139, 141-142, 150-151, 157 local government 162, 168-179, 181, 183-184, 194, 196, 200 management 8, 45, 62, 102, 111, 113116, 126-127, 130-131, 147-150, 157, 168, 183, 186-189, 192-194, 196-205, 207-208, 211-213 manufacturing 3-4, 17, 19, 24, 44, 51, 61, 96, 123, 126, 140, 141 market share 4, 15-16, 151-157 modernization 19, 27, 31, 118, 134 monetary freedom 148 monetary policy 141, 145, 147-148 mono-bank system 145 nationalization 145 non-performing loans (NPLs) 146-149 North American FTA (NAFTA) 34, 36, 39, 55 overcentralization 168 overseas capital 159 Pan-Beibu Gulf economic cooperation 13, 28, 29,123 Pan-Pearl River Delta (PPRD) 29 People’s Liberation Army (PLA) 86 political decentralization 169 pollution 117, 121-122, 124, 127-130 poverty 8, 34, 50, 112, 121, 159, 161164, 166-167, 182-184 primary sector 163-164 private finance initiative (PFI) 187, 210 productivity 4, 6, 24, 34, 44, 66-68, 82, 104, 106, 108-109, 111, 113-115, 117, 128, 133, 140-141,145-146 public facilities 186, 188, 192, 196 public spending 180 public-private partnership (PPP) 8, 142, 186-213


Qinghai-Tibet railway 166 regulation 40, 63, 130-131, 145, 148150, 158, 179, 195, 210-211 revolution 31, 80-81, 84, 88-89, 92 shortage 5-6, 8-9, 44, 62-63, 65, 73, 75-76, 88, 102, 110-111, 113, 128, 134, 188, 196, 199, 210 Silk Road 117, 118 South Asia FTA (SAFTA) 34, 52 spill-over 50 state-owned commercial bank 8, 146148, 150-153, 157 state-owned enterprises (SOEs) 107, 146-147, 192 subnational autonomy 169, 171 Thailand-U.S. Military Assistance Agreement 84 trade balance 5, 37-38, 42-43, 63-71, 73-75, 134 trade deficit 38, 99, 134 trade liberalization 7, 33, 50, 55, 61, 133-139, 141 trade surplus 15, 38, 61, 140 trade volume 14, 96 U Nu 77-83, 85-87, 89-90 undervaluation 61-62 utilization 7-8, 23, 87, 105, 115, 117, 121, 127, 129-131, 133, 168, 199, 202 welfare 112, 117, 177, 198, 211 World Health Organization (WHO) 194 World Trade Organization (WTO) 3, 33, 38-40, 45, 49, 50, 55, 63, 150 xiaokang 小康 (well-off) society 8, 164-166 xibu dakaifa 西部大开发 / “Develop the West” programme / Western Regional Development Strategy 8, 159-162, 164-166

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218 ♦ Index


8/3/2009 4:48:23 PM